Management Accounting Is The Practical Science Of Value Creation Accounting Essay


Management accounting is the practical science of value creation within organisations in both the private and public sectors (CIMA 2009). Developments in modern information systems made the management accountant more involved in the daily running of the organization and now management accountants have a "More proactive, and central role within the management process" ( Burns, Ezzamel, Scrapens. 2000).

As the hospitality industry continues to grow and the industry becomes even more competitive, it must increasingly become profit and cost conscious while maintaining the level of service necessary for a successful operation. In order to cope with this challenges new management accounting tools have shifted its focus from a "simple" or "naïve" role of cost determination and financial control to a "sophisticated" role of creating value through improved deployment of resources (Kaplan and Atkinson, 1988).

Tourism is considered one of the world's largest economies and in many areas the single largest source of investment and employment. Tourism and Hospitality in Malta contribute towards sustainable development, economic growth and employment as well as economic and social cohesion (Schembri, 2009). The EU tourism industry generates more than 5% of the EU GDP while in Malta the Tourism industry generates more than 12% of the GDP.

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Interestingly, given the crucial importance of tourism in the local economy, there is an active interest in hospitality management accounting in Malta. Several studies have been made at the University of Malta regarding specific areas of management accounting in Malta, but no studies have been made in the last 20 years that give an overview of the whole picture of the management accounting techniques used.

1.2 The need for such a study

Today the hotel industry in Malta is facing an increase in competition from emerging markets and uncertain business conditions. Currently more pressures are being made by hoteliers on management accountants to generate key, timely and accurate costing information as an aid to strategic decision making. Apart from this, government's vision for 2015 to be the centre of excellence in the hospitality industry heightens the importance of a study on this area.

Taking into consideration that a similar study has been conducted back in 1987, this dissertation will shed a new light on the current management accounting practices and future trends at the local hospitality industry.

(IMP to refer to this dissertation when doing the findings - if NOT remove this part)

1.3 Research Objectives

The objectives of this dissertation are:

To analyze the role of management accountant today in the hospitality industry in Malta.

To determine the level of adoption and the benefits derived from traditional and new management accounting techniques in local hospitality industry.

To investigate by surveys and interviews which management accounting techniques are taking place in the Maltese hospitality industry. The following are the areas to be assessed:

Techniques used for cost accumulation;

Method of pricing used;

Budgeting techniques used;

The performance evaluation method being used.

To outline the divergences that may exist between local and foreign hotels and to recommend those techniques which are value adding to Maltese hotels and are not yet being used.

1.4 Research Methodology

A qualitative and quantitative approach will be chosen for this study. A survey will be made to all the respondents of the three, four and five star hotels. Pilot tests will be undertaken with a group of managers and management accountants to refine the design and focus of the survey.

After the surveys, semi-structured interviews will be carried out with a number of management accountants or financial controllers who are highly experienced in cost and management practices in hotels, in order to give more insight on findings.

1.5 Chapter overview

Chapter 1 - Introduction - This chapter will include the background information of the topic, the objectives and need for such a study.

Chapter 2 - Literature Review - the literature review will include analyses of secondary data which include articles, journals, book, past dissertations and websites.

Chapter 3 - Methodology - This chapter delineates the methodology used to obtain the data needed for this dissertation.

Chapter 4 - Analysis and Discussion of Findings - This chapter will analyse and discuss the findings regarding the stated objectives.

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Chapter 5 - Conclusions and recommendations.

2.1 - General Introduction

The uncertain business conditions arising from the recently experienced economic downturn have put significant pressures on corporate management to make informed business decisions. Kaplan contends that if management accounting is to maintain its relevance, it needs to adopt to meet the dynamic needs of managers. In a survey conducted by Ernest and Young and the Institute of Management accounting in 2003, 82% of companies show the necessity for management accountants to generate key, timely and accurate costing information as an aid to strategic decision making. Therefore the role of management accounting is to aid rational economic decision-making.

Despite the emphasized need for actionable cost information, there are still obstacles in providing accurate numbers. Unfortunately, management accountants provide management with information that is not relevant for decision making. This is due to the fact that management accounting information can be used for other different purposes. (Macintosh, 1994) draws attention to the fact that managers use MA information for defensive purposes. This is because many organisations criticize decisions after the event, so they protect and defend themselves by collecting all information available before making decision. Macintosh also argued that management accounting is used as a bargaining purpose where interested parties try to endorse their idea with the use of accounting information.

Taking this into consideration, to design an effective management accounting system for an organisation, it is necessary to consider the circumstances in which it will be used. (Otley, 1980) states, that there is no universally appropriate accounting system applicable to all organizations in all circumstances. The design of MAS depends on several contingent factors, such as the external environment, company objectives, industry, technology and culture.

2.2. Management accounting systems used in hotels

2.2.1 Introduction

Research in management accounting has traditionally focused on MAS in manufacturing companies and yet little is known about management accounting in tourism industry such as hotels. (Mia & Chenhall, 1994) reports that hoteliers face a higher level of uncertainty at work than those in manufacturing due to the fact that management is constantly exposed to both the external environment, such as customers and competitors, and the internal environment such as provision of services. Therefore in this type of uncertain industry it is vital that managers make extensive use of information including MAS for making decisions (L. Mia, A. Patiar cited Clarke, 1999).

In the international Journal of Hospitality management, (Mia & Patiar, 2001) found that MAS is used the same by all levels of management. More importantly it was found that "if the information is not available on time, managers could not use it, even if they want to." This clearly shows that in order for MAS to be effective, management accountants should avoid the 'lateness' of cost information, which Johnson and Kaplan (1987) cited as a major problem. Due to the fact that once a room is not sold, the revenue from such room is an irretrievable loss (Katos, 1986), if management accounts are not real time, short term profitable decisions cannot be taken.

2.2.2 Techniques used for Cost accumulation systems and overhead allocation

The cost accumulation system that the hotel industry uses is crucial. As the study conducted by (Tanti, 2007) reveals, the fixed costs in Malta vary between forty to seventy five per cent of the total cost. This is confirmed by various authors such as (Katos, 1986) & (Brignal, 1997) that emphasise that in the short run most of the hotel costs are fixed costs. The importance here lies because the treatment of the fixed cost makes an impact on the profitability of the hotel, and hence makes an impact on the decision making. In the absorption costing, fixed costs are assumed to generate revenue in the future, so costs are carried forward to the next period. In marginal costing, fixed costs are assumed to save costs for the future (Horngren & Datar, 2002), so the cost is irrelevant and expired.

Apportionment and allocation of Overheads are effective management accounting tools that drive the efficiency of the business; however, many argue that one should balance the cost versus the benefit of having accurate system. (Katos, 1986) concludes that, hoteliers should allocate as much as possible, but abstain from apportionment. In Malta, Tanti (2006) found that no allocation or apportionment is being done. Respondents argued that these are too subjective and inadequate because pricing is market based. Furthermore, some respondent argued that trying to do this kind of exercise requires more work and cost, particularly if an extra employee needs to be recruited.

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2.2.3. Budgeting

According to Kaplan and Norton 1992, budgets are management tools that have traditionally been a key element of business control systems. Budgeting encourages managers to anticipate problems before they arise and minimise the hasty decision taken on the spur of the moment. Previous research concerning budgeting practices in hotels was conducted in Malta by (Borg, ????) & (Swain, 2006). However, they only focus on a specific aspect of budgeting.

International studies show that there is a difference between European and American hoteliers on the approach to budgeting. A study conducted in the UK by Jones 2006 shows that 36% of hoteliers use bottom-up approach to budgeting while in the USA a study by Schmidgall 1996 shows that 80% use bottom-up approach. This advocates that budgets in USA hotels tend to be more participative, thereby encourage increased ownership and commitment from lower level managers to the budget. Moreover (Jones, 2007), found that evaluating performance and aiding cost control are the key reasons why UK hotel operators use budgets. However, it is logical that budgets are used for many different purposes as additional usage will have little or no additional cost.

A study conducted by Pavlatos & Paggios, 2009 in the hotel industry in Greece show that almost all the Greek hotels use traditional budgets. The study reveals that almost half of the hotels in the survey use Zero-based budgets. It is argued that ZBB challenges the "status quo" i.e. the existing way of doing things. Obviously this can be a very difficult approach for some managers because it can threaten the continuation of their own existing activities. On contrary, findings by Collier & Gregory, 1995 show that very few hotels develop flexible budgets. Their belief is logical due to the high fixed cost base of the hotel sector.

2.2.4. Performance Measurements

Performance measures are aimed to support the objective and competitive strategy of the organisation. In the service organisation these measures tend to be different from those of the manufacturing industry because of the unique characteristics that the service industry operates. The challenges posed by the competitive environment means that the hotel performance measurement systems need to enable managers to effectively cope with the industry unique characteristics. Fitzgerald et al. 1991 indentified four unique characteristics for the hotel industry which are intangibility, perishable, heterogeneity (production and consumption tends to be separable) and that the service output vary from day to day since service tend to be provided by different individuals.

Studies conducted by Brander & Mcdonel, 1995 show that the UK hotel industry appears to concentrate on financial measures which according to Johnson & Kaplan and Fitzgerald, suffer from deficiencies such as the lack of accuracy and neutrality, a focus dominated by result rather than determinants and emphasis on short term often at the expense of strategic issues. In spite of these criticisms, businesses need to set measures in the context of strategy and the competitive environment (Fitzgerald & Moon, 1996) and understand the requirements of different stakeholders in association to their eminence on a range of measures.

An exploratory case study conducted by Haktanir & Harris, 2005 in a 5 star hotel in Cyprus reveals six main performance measures which are clustered under business dynamics, overall performance, employee performance measures, customer satisfaction measures, financial performance measures and innovative activity measures. These measures are more or less similar to the measures used in the balance scorecard which balances the use of financial and non-financial performance measures to evaluate short-term and long-run performance in a single report. The Balance scorecard devised by Kaplan and Norton in 1992 incorporate the leading measures which are the customer perspective, internal business processes and learning and growth which all lead to the lagging measures of financial perspective.

2.2.5. Pricing

Literature on pricing shows that a product or service should be priced to cover all the resources that are committed to it (Horngrem, Datar, & Foster, 2006). However, apart from the cost, business has to look at other factors such as whether the market sustains the price, competitor's prices, and homogeneity of service and management policies. Today, due to intense competition many businesses formulise their pricing on the customer perceived value. So this has to change the pricing philosophy from how much to price our customer to how much the customers are willing to pay. This requires a change in the costing approach where the management accountant will go through an interactive process of value engineering by removing as much as possible the non-value adding costs which do not satisfy the customers, in order to establish the target cost and price.

The hotel industry faces highly competitive markets whereby the need for accurately cost information is extremely important to enable them to be competitive. According to Nagle, 1987 there are four main means of pricing, which are competition, customer, psychology, cost or time. In a field study on pricing practices by Pellinen, 2003 in Finnish Lapland hotel industry, it was found that cost-based pricing are limited and in such cases prices are set on other grounds. This contradicts the previous studies held by Damitio & Schmidgall, 1990, found that hotel managers in USA rely on cost accounting for pricing.

The study of Pellinen 2003, revealed three different pricing practices, explicitly, the "strong calculator", the "customer enticer" and the "imitator". Only hoteliers who have the strongest competitive position, which in this study are classified as strong calculator, are able to rely their pricing on cost accounting. The customer enticer and the imitator allow the price decision-makers in other hotels to determine their pricing, however the former generate a price image in the psyche of the customer. The study concluded that only the hotels that have been in operation for an extensive time and grown in size choose the pricing that a number of smaller hotels are following.

2.3. The Maltese Hotel Industry

Refer to:

Thesis of stock cost control by Emanuel gauci

To be done:

Total 2.1 and 2.2 = 1750 words

2.3 = target 250 words

Literature review 2000 words


3.1 Introduction:

The purpose of this study is to assess the applicability and the use of management accounting techniques specifically cost accumulation, pricing, performance evaluation and budgeting within the Maltese hotel industry. In order to establish the current use of these techniques a multi-strategy research methodology combining an extensive questionnaire survey with a series of in-depth interviews. Having this multi-strategy method, researchers can perk up their confidence in the accuracy of findings by seeking convergence, corroboration and correspondence of results from different methods (Denscombe, 2007).

3.2 The population and sampling:

The main source of data was a detailed list of the entire hotels in Malta and Gozo provided by the Malta tourism authority. This list includes the population of hotels in the Maltese Islands split into two, three, four and five star hotels. The following is the population split into various sectors, of the hotel industry provided by MTA in September 2010.

Malta and Gozo:

3 Star

4 Star

5 Star


No. of Hotels





Total No. of Beds

Minimum no. of beds

Maximum no. of beds

Gozo and Comino:

3 Star

4 Star

5 Star


No. of Hotels





No. of Beds

Minimum no. of beds

Maximum no. of beds

Sourse: Malta Tourism Authority

Forsi include Gozo and Malta ma xulixn issa nara

The target population exclude the 2 star establishments because of their limitation mainly financial constraints to adopt management accounting techniques. Moreover, the drive to include only three, four and five star hotels was supported by international studies that the majority of them focus on hotels operating in these sectors.

Given the complete list amounted to 101 hotels and because in survey terms this is a small-scale study, a census survey was considered to be the most appropriate. Moreover as (Denscombe, 2007) stated in his book and this is generally accepted by other researchers, a minimum of 30 results are required for meaningful statistical analysis confirms the need for census survey.

3.3 Primary Data Collection

Questionnaires and in-depth interviews was the main primary data collection. The form of the questionnaire was an online questionnaire which was sent by email to the entire three, four and five star hotel. Following the collection and analysis of the questionnaire responses, a series of in depth interviews was conducted to investigate the issues raised by the questionnaire.

3.3.1: Pilot test and preparatory work

The first step after the questionnaire was formulated; a pilot test took place by mean of an interview, to improve the plan and focus of the survey and to make sure that the questionnaire content was easy to be understood. This pilot test was conducted with a three star general manager, a four star financial controller, and with two five star financial controllers. Apart from this, the hotels interviewed in the pilot test vary from privately owned hotels and hotels members of a multinational chain. This was done to ensure the questionnaire will cater for all types of three, four and five star hotels.

Before the online questionnaire was send, a phone call to all 101 hotels was made in order to get the email of the respondent and also to explain the reason why the response rate is crucial. Out of these 101 hotels, 9 of the hotels did not answer or specifically stated that they were busy and were not interested in the survey. This was an important step toward getting a good response rate because the email was sent directly to the inbox of the respondent. Moreover, in order to get accurate results on a direct question regarding profits, an analysis of thirty hotels audited financial statements available at MFSA were made. This secondary research ensures that the ranges given, reflect the actual Maltese hotel profits.

3.3.2: The design of questionnaire

The questionnaire was designed in a way that apart of determining the reliability and validity of the data collected, it also consider the time constrain of the respondents. In addition it was planned in way so that the findings could be scrutinized against prior surveys in this study area. The bulk of question were close-ended questionnaire in order to be less time consuming for the respondent and also better results can be obtained. However to eliminate the bias from close ended questions, an open-ended question was designed for each section to track more detail and also highlight other techniques not listed in literature.

The final questionnaire is split into 5 sections:

Section A: Background information of the hotel

Section B: Techniques used for cost accumulation and overhead treatment

Section C: Pricing Techniques

Section D: Budgeting Techniques

Section E: Performance Evaluation Techniques

The online questionnaire was conducted between November and December 2010. A total of 92 questionnaires were sent to the respective respondents. The program used to conduct the online questionnaire had the facility to code all the respondents so that non-responses could be followed up. In all three reminders were sent until a satisfactory response rate was achieved.

By post??????

3.3.3. In-depth Interviews

After - ikteb ma min ghamiltom u ghaliex (skont response rate)

3.4 Response Rate:


p.g. 431 - changes in hotel industry budgetary practise + thesis of tanti

This pilot test with:

three star general manager, - downtown

a four star financial controller - calypso hotel

2 five star financial controllers - ta cenc and san lawrenz hotel

pilot test vary from:

privately owned hotels and

hotels members of a multinational chain.

3.5 Statistical analysis used:

See p. 431 of changes in hotel industry budgetary practice

3.6 Limitations and Conclusion

See. Pg 28 of tanti..

Amel test li bat 5 questionaire by mail and 5 by internet to find the statistical significane bejniethom.

Pilot testing - spss introductory