1.

0 Introduction
This first workshop for 7260THS provides an overview of the course and
introduces you to the essentials of financial accounting and management
accounting, ultimately so that you can make better decisions as a manager
in a tourism or hospitality business. You will need to review the mini-topics
associated with this Topic BEFORE you attend the workshop, in order to get
the most out of your class-time and maximise your chances of success in this
course. Each mini-topic is presented in a short video.
The mini-topics included with this Topic are:
1.1 The Need for Accounting Information
1.2 The Nature of Accounting Information
1.3 Accounting Information Needs of the Tourism & Hospitality Industries
1.4 Ownership & Management Structures in Hotels

Learning Outcomes
By the end of this topic, you should be able to:

 Recognise the value of accounting information for optimising the

financial performance of tourism and hospitality businesses.
 Distinguish between different types of stakeholders that require
accounting information in order to make decisions with financial
implications.
 Differentiate between financial accounting and management
accounting.
 Explain how the unique characteristics of the tourism & hospitality
industries impact the financial and management accounting needs
of decision-makers.
 Identify different ownership and management structures that are
common in the global hotel industry.

Required Reading
The textbook for this course is Accounting Essentials for Hospitality
Managers, 4th edition, by Chris Guilding and Kate Mingjie Ji. You can
purchase a hard copy of this textbook from the campus bookshops or online.
Griffith Library holds hard copies and an e-book version of this textbook.
The required reading for this Topic is Chapter 1: Hospitality Decision-Makers’
Use of Accounting.
1.1 Learning Materials
1.1 The Need for Accounting Information
This mini-topic introduces you to the overall purpose and context of this course, and outlines
the mini-topics that are included in Topic 1 “Financial Information Needs for Tourism &
Hospitality Decision-Makers”. This mini-topic highlights the importance of financial decision-
making for personal and business success, and considers how information is key to making
good decisions. This mini-topic also encourages you to think about how different types of
hospitality and tourism businesses use information for different purposes, and how different
types of stakeholder groups have different motivations and needs for financial and accounting
information.
Watch the video below, and take your own notes using the Note Aid for this topic. There are
some Quick Review Questions below that you should be able to answer after watching this
video.
1.2 The Nature of Accounting Information
This mini-topic explains what financial accounting is, what management accounting is, and
how these two types of accounting serve the needs of different stakeholders. This mini-topic
also emphasises that accounting information is only one aspect of understanding the
performance of a business, and that in hospitality and tourism in particular, non-financial
information is also a necessary consideration when making a sound business decision. The
financial implications of business decisions are most often measured in terms of their impact
on profitability, and to that end, this mini-topic also briefly introduces one of the main
financial statements used to evaluate a company: the income statement. The example
provided is in a hospitality context, following the Uniform Systems of Accounts in the Lodging
Industry (USALI).
Watch the video below, and take your own notes using the Note Aid for this topic. Note-
taking is a skill that helps you to remember important concepts and learning points, for later
review and application.
1.3 Accounting Information Needs of the Tourism & Hospitality Industries
This mini-topic considers some of the unique characteristics of the tourism & hospitality
industries that lead to a need for different types of accounting information as well as
particular analytical techniques in order to aid good decision-making. Hotels are highlighted
as a particular focus for the course, given the wide range of different business processes
enacted in the organisation.
Watch the video below, and take your own notes using the Note Aid for this topic. You may
wish to review your notes or this video when attempting the exercises in the Excel Workbook
for this topic.
1.4 Ownership & Management Structures in Hotels
This mini-topic introduces the complex nature of management and ownership structures in
the global hotel industry. It is important for you to understand that the owner of the hotel is
very often not the operator of the hotel, and that distinction between hotel ownership and
hotel operation has important contractual ramifications for financial decision-making. It is not
the purpose of this course, nor this mini-topic, to provide an exhaustive review of hotel
ownership and management structures – this mini-topic is simply designed to introduce you
to the idea that the management/ownership structures of hotels around the world are murky,
complex and not always as they might appear from the outside.
Watch the video below, and take your own notes using the Note Aid for this topic. Note that
you do not need a detailed understanding of all of the nuances of hotel
ownership/management structures and arrangements for the purposes of this course – all
you need for now is a developing understanding that the arrangements are not as simple as
they seem on the outside. You can approach the teaching team for further readings and
resources on hotel ownership/management structures if you are very interested.

Summary
After viewing each of the mini-topic videos for this Topic, you should have a good idea of
what this course will be about. As you progress through the course, you will be exposed to
more detail about the broad concepts that were introduced in the mini-topics for this first
workshop.
The Quick Review Questions for each mini-topic should help to check that you understood
some of the main points in each video.
The learning activities in the Excel Workbook will be the focus of the workshop related to this
topic that you have just finished reviewing – attempting the tasks before the workshop will
make you better prepared to ask questions to deepen your understanding.
Obviously, you want to try and get the answers to the exercises right, but if you don’t get
them right, you want to use the workshops to understand why you weren’t right. It’s all about
learning.
Also in the first workshop, you will get to hear more about how you will be assessed in this
course. And ask questions, of course.
And remember… it’s always best to attend workshops live (fully prepared and engaged), but if
you can’t make it to a workshop, they will always be recorded and available to you via the
Microsoft Teams site for 7260THS so you can catch up.
1.2 Workshop Preparation & Materials

Workshop Materials
Now that you have reviewed the four mini-topics for this Workshop, you should attempt the
learning activities included in the Excel Workbook for the topic “Financial Information Needs
for Tourism & Hospitality Decision-Makers” BEFORE you attend your first Workshop. Come
prepared with your questions about the mini-topics and/or the workshop tasks, and we can
all learn from each other during the interactive workshop.
The Workshop Guide contains learning activities for you to attempt based on the course
content for the topic.

Workshop Solutions
Suggested answers & solutions to the workshop learning activities and extra practice tasks
will become available via L@G after the workshop has been delivered. Please be aware that
discussion questions can also result in different sensible answers. See the suggested answers
for the workshop tasks. [The solutions will be available after the respective workshop.]
2.0 Introduction
Topic 2 introduces you to the standardised financial statements that are used in financial
accounting. Companies are required to produce a range of different financial statements for
external reporting, for example, for taxation purposes, to report to shareholders and
investors, or to procure a loan from a lender. The focus of this course is on the Income
Statement (which reports the financial performance of a company over a period of time) and
the Balance Sheet (which reports the financial position of a company at a point in time).
While the Balance Sheet is primarily used for external reporting, its composition is affected by
a business's day-to-day economic transactions. For this reason, it is useful to understand how
commonly occurring transactions affect the financial position of the business that is
ultimately reported in the Balance Sheet. Accordingly, in this topic, you will also learn how to
trace the impact of day-to-day transactions on the financial position of the business.
You will need to review the mini-topics associated with Topic 2 BEFORE you attend the
workshop, in order to get the most out of your class-time and maximise your chances of
success in this course.
Each mini-topic is presented in a short video below. The mini-topics included with Topic 2 are:
2.1 Introduction to Financial Statements
2.2 The Income Statement
2.3 The Balance Sheet
2.4 Transaction Analysis
Learning Outcomes
By the end of Topic 2, you should be able to:
 Explain why companies need to produce financial reports and statements for external
stakeholders
 Name the four financial statements that must be included in a company’s annual
report as per IFRS standards
 Identify the basic elements of an Income Statement and a Balance Sheet
 Recall the accounting equation underlying the Balance Sheet
 Specify the impact of a hospitality business’ day-to-day economic transactions on the
Balance Sheet of the business

Required Reading
The textbook for this course is Accounting Essentials for Hospitality Managers, 4th edition, by
Chris Guilding and Kate Mingjie Ji. You can purchase a hard copy of this textbook from the
campus bookshops or online. Griffith Library holds hard copies and an e-book version of this
textbook.
The required reading for Topic 2 is Chapter 2: Analysing Transactions and Preparing Year-End
Financial Statements

Downloads
  Topic 2 Note Aid. Download Topic 2 Note Aid. for the topic “Understanding Financial
Statements”. Note that this Note Aid is not intended to work as “lecture slides”,
because of the audio-visual nature of the course content. You will need to watch the
videos for this topic, and use the Note Aid to assist with your own individual note-
taking.

2.1 Learning Materials

2.1 Introduction to Financial Statements
This mini-topic introduces you to the main financial reports and statements
that a business must produce for its external stakeholders. External
stakeholders require information about the financial health of a business, its
long-term financial sustainability, and its operational efficiencies.
Standardised financial accounting reports provide such information to
stakeholders such as investors, regulators, lenders, government and
suppliers. This mini-topic highlights the purposes and requirements of
financial reports and statements and presents the International Financial
Reporting Standard (IFRS) as one example of an externally mandated
requirement for businesses to follow certain financial accounting standards.
2.2 The Income Statement
This mini-topic explains the main principles and elements of the Income Statement. An
Income Statement reports on financial performance over a specific period of time, e.g. a
quarter, a half-year, or a full year. While the Income Statement presented in the annual report
of a publicly listed tourism or hospitality company will present a high-level summary of the
revenues and expenses incurred by the whole company, the mechanics and principles of the
Income Statement can be applied to all levels of a business, from the whole company down to
the individual department level. In this mini-topic that you will also learn that revenue is not
the same as cash, an important accounting principle that you need to understand.
Watch the video below, and take your own notes using the Note Aid for this topic. Note-
taking is a skill that helps you to remember important concepts and learning points, for later
review and application.
2.3 The Balance Sheet
This mini-topic introduces the main elements of the Balance Sheet: assets, liabilities and
owner’s equity. The Balance Sheet reports on the financial position of a business at a point in
time – this is in contrast to the Income Statement, which reports on the financial performance
of a business over a period of time. This mini-topic explains how the Balance Sheet (as its
name suggest) must always balance according to the accounting equation Assets = Liabilities +
Owner’s Equity.
2.4 Transaction Analysis
This mini-topic demonstrates how everyday economic transactions affect the financial
position of a business and how the transactions conducted over a period of time can be
analysed in order to report the Balance Sheet of a business at a point in time. This
understanding is useful to you as you start your management career, as it highlights how your
management decisions and activities impact the financial accounting reports that are
important to external stakeholders. As a junior/middle manager in a large organisation, this
will help you to see your part in the bigger picture, or as a small business owner; you can
better understand how your operational and investment decisions will impact the financial
position of your business.
Summary
After viewing each of the mini-topic videos, you should understand why companies need to
produce financial reports and statements for external stakeholders, and you should be able to
name the four financial statements that must be included in a company’s annual report as per
IFRS standards. You should have a grasp of the main elements of the Income Statement and
the Balance Sheet, and be able to remember the accounting equation (Assets = Owner’s
Equity + Liabilities) that will always be in balance. The understanding that you have developed
through the mini-topics for Topic 2 will allow you to identify the impact on the Balance Sheet
of everyday economic transactions conducted by a business.
2.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Understanding Financial
Statements", you should attempt the learning activities included in the Excel Workbook for
this topic BEFORE you attend the workshop. Come prepared with your questions about the
mini-topics and/or the workshop tasks, and we can all learn from each other during the
interactive workshop.
The Excel Workbook outlines the learning activities for the topic “Understanding Financial
Statements” (refer to the worksheet tab titled "Workshop Guide"). You should attempt the
workshop tasks BEFORE you attend the workshop so as to get the most out of the workshop.

3.0 Strategic Analysis of Hotel Financial & Operational Performance

Topic 3 introduces you to the idea of using ratios to analyse the financial and operating
performance of a business. Ratios allow you to derive meaning from raw numbers and can
assist you with making comparisons over time, against targets, and across a range of other
useful benchmarks. Many different stakeholders are interested in the efficiency and
effectiveness (i.e., profitability) of a business, and they are also interested in the short- and
long-term viability (i.e. financial stability) of the business. This topic will help you understand
the key ratios and techniques that are used to derive meaning from the raw numbers
presented in financial statements. While generic ratio analysis techniques are applicable to
many businesses, there are some measures of operational and financial performance that are
unique to the hotel industry, and those key measures are also covered in this topic.
You will need to review the mini-topics associated with Topic 3 BEFORE you attend the
workshop, in order to get the most out of your class time and maximise your chances of
success in this course. Each mini-topic is presented in a short video below.
The mini-topics included with Topic 3 are:
3.1 Ratio Analysis
3.2 Benchmarking
3.3 Profitability
3.4 Financial Stability
3.5 Operational Performance Measures in Hospitality
Learning Outcomes
By the end of Topic 3, you should be able to:
 Explain the concept of common-size analysis and how it can be useful for analysing the
financial performance of a business
 Describe different types of benchmarks that a business can use to evaluate its financial
and operational performance
 Evaluate the profitability and financial stability of a hospitality business using
appropriate measures and techniques
 Calculate and interpret operational performance measures that are widely used in
hotels and hospitality

3.2 Benchmarking
This mini-topic explains the idea of benchmarking, an important tool for understanding
whether your business’ financial and operational performance has been good, average, or
bad. If you consider one static piece of information alone, this does not tell you how the
result compares with results achieved previously or by other businesses and operations.
Benchmarking provides you with a standard against which you can measure your own
performance. This mini-topic introduces some of the benchmarks that are commonly used in
hotels for evaluating performance or setting targets.
3.3 Profitability
This mini-topic presents the key ratios, measures and techniques that are used to evaluate the
profitability of a company. Until now, you may have just thought of profit as “sales minus
expenses”, but there is a lot more to it than that. Owners and investors are not simply
interested in the money left from revenue after costs have been paid – they want to know
how well their investment is being used to generate that profit to be able to compare the
value of different investments. This mini-lecture explains the generic term ‘return on
investment’ (ROI) and then explains why we will instead focus on the measure ‘return on
assets’ (ROA) in 7260THS, as a more useful and specific measure of hotel General Manager
effectiveness. You will learn how the ROA measure can be broken down to highlight two
aspects of profitability: profit ratios, and asset turnover ratios. In terms of profit ratios, this
mini-topic demonstrates the different levels of profit that can be assessed via a hotel’s Income
Statement. It is important to consider profit at different levels of the organisation, as not all
managers within one hotel have the same level of influence over important financial
resources (i.e., there is a ‘disparity of functions’). The same goes for asset turnover ratios –
there are different types of ratios for evaluating different aspects of asset utilisation, and you
will learn the key ratios and techniques in this mini-topic, as well as how to interpret the
results of your calculations.
3.4 Financial Stability
This mini-topic introduces the key ratios, measures and techniques that are used to evaluate
the financial stability of a business. Financial stability is considered in two ways: short-term
and long-term. Short-term stability is about liquidity, or the ability of the business to re-pay
its financial obligations that are due within the next 12 months (or a shorter period, if
required). Long-term stability is about the ability of the business to repay all of its financial
obligations, not just the short-term ones. External stakeholders are particularly interested in
the stability of a business, as they are making decisions about whether to invest (equity) in a
business, to provide finance (lending) to a business, or to provide short-term credit to a
business. In this mini-topic you will learn key ratios for assessing both short- and long-term
stability, and how to interpret the results of your analyses.
3.5 Operational Performance Measures in Hospitality
This mini-topic presents important operational performance measures specifically for the
hotel and restaurant contexts. These measures are used extensively in the industry, as they
are key drivers of other financial outcomes for a hospitality business. In hotels, these
measures are used to evaluate the performance of departmental managers, and you are likely
to have these measures as key performance indicators if pursuing a career in hospitality
management. In this mini-topic you will learn why the measures are important, what they tell
us about performance, and how to calculate the relevant ratios.

Summary
After viewing each of the mini-topic videos for Topic 3, you should understand why ratio
analysis is a useful tool for making meaning from financial statements and management
accounting reports. Combined with benchmarking, ratio analysis allows you to evaluate the
effectiveness and efficiency of financial and operational performance. Through the mini-topics
and learning activities included in Topic 3, you should develop the ability to apply and
interpret key measures for evaluating the profitability and financial stability of a business, as
well as the operational performance of hotels and restaurants.
3.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Strategic Analysis of Hotel
Financial & Operational Performance", you should attempt the learning activities included in
the Excel Workbook for this topic BEFORE you attend the workshop. Come prepared with your
questions about the mini-topics and/or the workshop tasks, and we can all learn from each
other during the interactive workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.

4.0 Introduction
Topic 4 focuses on the measurement of performance within hospitality and tourism
organisations. In the workshops up to this point, we have focused on the external need for
accounting information by stakeholder groups such as lenders, suppliers, investors and
government. So far, we have focused on purely financial measures to evaluate and describe
the performance of a business. In this workshop, you will learn about approaches and issues
related to the measurement of internal performance. You will consider why financial
measures are unable to tell the complete story of performance. In hospitality and tourism,
measures related to customers, employees and internal processes are also fundamental to
achieving a sustainable competitive advantage. In the second mini-topic in this workshop, you
will learn about the Balanced Scorecard, a structured approach to setting strategic objectives
and measuring performance against agreed targets, devised by Kaplan & Norton (1996) and
adopted widely in service organisations around the world.
You will need to review the mini-topics associated with Topic 4 BEFORE you attend the
workshop, in order to get the most out of your class-time and maximise your chances of
success in this course. Each mini-topic is presented in a short video below.
The mini-topics included within this topic are:
4.1 Internal Performance Measurement
4.2 The Balanced Scorecard
Learning Outcomes
By the end of Topic 4 you should be able to:
 Explain the shortcomings of financial measures of performance
 Identify a balanced range of performance measures for a hospitality or tourism
business
 Describe the inter-relationships between the four performance dimensions of Kaplan
& Norton’s (1996) Balanced Scorecard approach

4.1 Learning Materials

4.1 Internal Performance Measurement
This mini-topic introduces you to issues related to the measurement of
performance within tourism and hospitality organisations. While financial
measures are the core focus of this course, a hospitality or tourism business
cannot ignore non-financial measures related to its customers, employees
and internal processes. In this mini-topic,, you will learn about the concept of
tangible and intangible assets, as well as key shortcomings of financial
performance measures. While financial measures are not perfect, they are
also not obsolete. This mini-topic considers key principles for designing
performance measurement systems that incorporate a balanced range of
performance measures, including financial and non-financial measures,
lagging and leading measures, internal and external measures, as well as
subjective and objective measures.
4.2 The Balanced Scorecard
This mini-topic presents the Balanced Scorecard, a structured, comprehensive framework for
measuring performance and achievement of strategic objectives across all important aspects
of the business, not just the aspects that can be measured in a purely objective and monetary
way. This requires quantifying not just the tangible assets, but also the intangible assets,
thereby placing value on the non-financial capabilities within the organisation. Using the
Balanced Scorecard approach involves setting strategic objectives and measuring performance
across four interrelated performance dimensions: financial, customer, internal processes, and
learning & growth. For hospitality and tourism businesses, the Balanced Scorecard approach
is a highly suitable performance measurement tool and is adopted by many companies
around the world. You are quite likely to be evaluated against a Balanced Scorecard in your
management career.
Summary
After viewing each of the mini-topic videos, you should understand the importance of a well-
designed performance measurement system, incorporating a balanced range of measures of
both financial and non-financial dimensions of performance, for a hospitality or tourism
business to sustain competitive success in the long-term. You should also now be familiar with
Kaplan & Norton’s (1996) Balanced Scorecard approach to strategic management and
performance measurement – and you can expect to come across this approach in practice
during your career.
4.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Internal Performance
Measures", you should attempt the learning activities included in the Excel Workbook for this
topic BEFORE you attend the workshop. Come prepared with your questions about the mini-
topics and/or the workshop tasks, and we can all learn from each other during the interactive
workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.
5.0 Introduction
Topic 5 introduces the concept of internal control, and focuses on the guiding principles of
internal control systems, as well as specific practices that are used to control hospitality and
tourism operations. You will learn why control is important, and what the purposes of internal
control systems and procedures are. Some features of the hospitality industry present unique
management challenges when it comes to achieving control, in particular the emphasis on
cash transactions. The mini-topics in this workshop will introduce you to important cash
control practices, as well as demonstrate the techniques involved in performing a bank
reconciliation. Other recurring transactions that are often a source of inefficiency or a target
for fraudulent activities include purchases, payroll and inventory – in this workshop you will
also learn about common practices and procedures for controlling these aspects of a
hospitality or tourism business.
You will need to review the mini-topics associated with Topic 5 BEFORE you attend the
workshop, in order to get the most of your class-time and maximise your chances of success
in this course. Each mini-topic is presented in a short video below.
The mini-topics included with Topic 5 are
5.1 Principles of Internal Control
5.2 Cash Controls
5.3 Account Reconciliation
5.4 Purchases, Payroll & Inventory Controls
Learning Outcomes
By the end of Topic 5, you should be able to:
 Explain the four main purposes of internal control
 Identify management challenges in the hospitality industry to achieve internal control
 Describe four common cash control practices and the related principles of internal
control systems that these practices support
 Give examples of procedures and systems to control purchasing, payroll, and inventory
and the related principles of internal control systems that these systems/procedures
uphold
 Conduct a simple bank reconciliation

5.1 Learning Material

5.1 Principles of Internal Control
This mini-topic introduces the concept of internal control, and the main purposes of internal
control: safeguarding assets, promoting operational efficiency, maintaining accurate and
reliable records, and adhering to business policies. Internal control procedures create a
structured and regulated environment within a business, where important processes are not
left to chance. This mini-topic highlights the particular management challenges faced in the
hospitality industry that can be overcome or reduced through effective internal control, and
you will learn about administrative control systems and accounting control systems that are
designed to both prevent and detect internal control issues. This mini-topic also includes a
summary of the guiding principles for designing internal control systems – principles that you
will need to consider when you’re a manager designing operational procedures.
5.2 Cash Controls
This mini-topic explains why cash is an easy target for theft, and covers common cash control
practices, and the guiding principles of internal control systems behind these practices. The
multiple steps involved in the various inter-related cash control procedures are demonstrated
in a practical example from a casino hotel. In this mini-topic, you will also learn about the
petty cash system used by hotels to enable cash payments for small one-off items.
5.3 Account Reconciliation
This mini-topic explains account reconciliations as an important internal control procedure,
and focuses on the steps involved in performing a bank reconciliation. Bank reconciliation
procedures are necessary because internal records of cash balances rarely mirror external
bank records, and you will learn why this is so in this mini-topic. Another reason to learn
about bank reconciliation procedures is because they provide a practical example of
fundamental concepts in accounting – in particular the difference in how credits and debits
are recorded, depending on whether an account is considered an asset or a liability.
5.4 Purchases, Payroll & Inventory Controls
This mini-topic presents common practices and procedures for controlling purchasing, payroll
and inventory, and explains the principles of internal control systems that guide the
implementation of these practices and procedures. Purchasing, payroll & inventory processes
can be a source of inefficiency or a target for fraudulent activities if they are not properly
controlled because these processes include many recurring similar transactions, and it is in
the recurrence of repetitive transactions that fraud and inefficiency can hide.
Summary
After viewing each of the mini-topic videos, you should understand the importance of well-
designed internal control systems and procedures, in order to safeguard assets, promote
operational efficiency, maintain accurate and reliable records, and adhere to business policies.
As a manager of a hospitality or tourism business, you will need oversee (and possibly even
design) these internal control systems, with a particular emphasis on cash control procedures
due to the continuing prevalence of cash transactions in these industries. Through the
learning from this workshop topic, you should now understand the guiding principles of
internal control systems, be able to give practical examples of internal control procedures for
controlling cash and other recurring transactions and apply the bank reconciliation technique.
5.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Internal Control", you
should attempt the learning activities included in the Excel Workbook for this
topic BEFORE you attend the workshop. Come prepared with your questions about the mini-
topics and/or the workshop tasks, and we can all learn from each other during the interactive
workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.
6.0 Introduction
Topic 6 introduces the concept of responsibility accounting, and demonstrates how budgeting
and forecasting facilitate the allocation of responsibility across the sub-units of hospitality
and tourism businesses. Responsibility accounting involves sub-dividing an organisation into
its units of responsibility, and then holding a specific manager, or management team,
accountable for their allocated unit of responsibility within the organisation’s overall
activities. A hospitality or tourism business can be sub-divided into different areas of
responsibility based on the sub-unit’s control of revenue, costs and/or an asset base – these
different centres of responsibility are referred to as cost centres, profit centres and
investment centres. Through the mini-topics in Topic 6, you will learn what each of these
responsibility centres are, and how performance measures used to evaluate manager
performance are most effective when they are tailored to each type of responsibility centre.
In Topic 6 you will also learn about budgeting and forecasting, two very important tools for
projecting and controlling the financial outcomes of a business or sub-unit of responsibility.
You will explore the role of the hotel budget; how forecasting informs the hotel budget;
different types of budgets commonly used in hotels; and, the processes involved in setting
budgets for hotels and sub-units within hotels.
You will need to review the mini-topics associated with Topic 6 BEFORE you attend the
workshop, in order to get the most of your class-time and maximise your chances of success
in this course. Each mini-topic is presented in a short video below.
The mini-topics included with Topic 6 are:
6.1 Principles of Responsibility Accounting
6.2 Cost Centres
6.3 Profit Centres
6.4 Investment Centres
6.5 The Role of Budgets
6.6 Forecasting
6.7 Types of Budgets
6.8 Setting Budgets
Learning Outcomes
By the end of Topic 6 you should be able to:
 Describe the three dimensions of accountability for which a manager could be held
responsible, and the hierarchical order of these accountability dimensions
 Suggest appropriate measures of performance for managers of each type of
responsibility centre in a hotel or tourism business
 Conduct an analysis using the residual income measure to evaluate decisions made by
a hotel property’s General Manager relative to the hotel company’s strategic
objectives
 Describe the various ways that the budget helps to facilitate control in a hotel and
identify the political side-effects of setting budgets that can impact on manager
behaviour in hotels
 Explain the key factors involved in producing accurate and reliable forecasts of future
sales
 Differentiate between different types of budgets in hotels
 Use forecasted sales and expense data to create simplified purchase, production and
direct labour budgets in a hotel setting

6.1 Learning Material

6.1 Principles of Responsibility Accounting
This mini-topic introduces the concept of responsibility accounting, and how
it can be used to facilitate internal control and support the achievement of
an organisation’s strategic objectives. Responsibility accounting involves
dividing up an organisation into its units of responsibility, depending on three
dimensions of accountability: control of inputs, control of outputs, and
control of the asset base. You will learn that the organisational chart depicts
and assigns responsibility across the organisation, and the budget is a key
tool in responsibility accounting. By limiting the accountability of managers
to those things that are within the direct control of a manager, managers are
more motivated to positively influence the financial and operational results
of their unit. This mini-topic provides you with a framework for allocating
financial and organisational responsibility across all sub-units of a hospitality
or tourism business.
6.2 Cost Centres
This mini-topic explains what a cost centre is in responsibility accounting, and provides an
overview of the two main types of cost centres: engineered cost centres and discretionary
cost centres, as well as common examples of these types of cost centres in hotels. You will
learn the fundamental differences between the two types of cost centres, as well as the
impact that these differences have on the performance evaluation of engineered cost centre
managers versus discretionary cost centre managers.
6.3 Profit Centres
This mini-topic explains what a profit centre is in responsibility accounting, and provides
some examples of different profit centres in hotels. To best evaluate the performance of profit
centre managers, profit needs to be measured at the level that is most controllable by the
manager – so this mini-topic considers different levels of profit measures that are appropriate
for evaluating managers of different profit centres. You will also learn why profit is not a
perfect measure of performance, despite still being a fundamental indicator of success. Non-
financial measures of profit centre performance remain important, and responsibility
accounting practices can also be adapted to enhance the achievement of non-financial
outcomes in profit centres.
6.4 Investment Centres
This mini-topic explains what an investment centre is in responsibility accounting, and how
treating the whole of a hotel as an investment centre influences the evaluation of a hotel
General Manager’s performance. As you have learnt in previous topics in this course, GMs
often have maximising ROA as a key performance indicator. In this mini-topic, you will learn
about goal incongruency, and how using maximising ROA as a KPI can create a misalignment
between the goals of a GM at an individual hotel property and the over-arching goals of the
hotel company. You will also learn about the residual income (RI) measure, which can be used
as an alternative to ROA as a measure of the performance of an investment centre manager.
You will learn to calculate and interpret RI, and you will develop an appreciation of how RI can
be a more effective measure of performance in terms of organisational alignment in a large
hotel company.

6.5 The Role of Budgets

This mini-topic explains how and why a budget is an essential management tool used for
planning and control. A budget is probably the most visible way in which accounting is used in
the management control process. You will learn about the key roles that a budget plays in
facilitating control in a hotel, particularly in terms of motivating staff towards the
achievement of certain goals. However, the budget has limitations as a management tool, and
can encourage less than desirable manager behaviours, if budgets and budget setting
processes are not managed effectively. In this mini-topic, you will learn how and why a
budget encourages managers to act in certain ways. This knowledge will help you to think
critically about using budgets effectively in order to control financial and operational
outcomes.
6.6 Forecasting
This mini-topic explores forecasting and how it is used to support the setting of a budget.
Before you can create a budget of revenues, expenses and profits for an upcoming period, you
need forecasts. Forecasting is about estimating or predicting what will happen in the future.
You will learn what types of information are used to derive future forecasts, and about the
internal and external factors that can impact on a forecast for an upcoming period of time.
This mini-topic is a very brief introduction to forecasting, simply so you understand what
forecasting involves and why forecasting is important for planning and control of a hotel
business.
6.7 Types of Budgets
This mini-topic introduces different types of budgets that are used within one organisation.
There are many different types of budgets that one hotel might set up, for one financial
period. You will learn that there are different types of budgets for different business activities,
as well as budgets that cover different lengths of time. This mini-topic focuses on budgets in
hotels, and you will learn the master budget for a hotel property is comprehensive, in that it
reports all revenues earned and expenses incurred by a hotel, yet the hotel master budget is
not very detailed because it has to summarise all of the hotel’s activity in one report. Instead,
more detailed budget schedules are produced for individual departments and responsibility
centres, and these more detailed budgets are used to motivate and evaluate the performance
of junior and middle managers. This mini-topic will help you understand the various types of
budgets that are produced and why they are produced. This understanding will help you to
interpret a budget, as well as think critically about the type of budget that is most appropriate
to the responsibilities and control of different managers.
6.8 Setting Budgets
This mini-topic first explores the organisational processes involved in setting budgets in
hotels, and then presents a worked example of setting various linked budget schedules, using
a simplified example of the pastry kitchen in a hotel. The budget setting process in hotels is
complex, especially in chain hotels where there is a separation between the hotel owner and
the hotel management company. You will learn about who is involved in setting a hotel’s
budget and how the hotel budget committee coordinates the development of the hotel’s
annual budget, for joint approval by the hotel’s General Manager, the hotel management
company, and the hotel owner. To illustrate how multiple budget schedules for specific areas
of responsibility are connected to form a hotel or a department’s master budget, this mini-
topic steps you through an example of developing a production budget, a purchases budget
and a direct labour budget, all based on forecasts of sales and operational inputs.
Summary
After viewing each of the mini-topic videos for Topic 6, you should now be able to explain the
concept of responsibility accounting, and how it can be applied in hotels to facilitate internal
control and the achievement of strategic objectives. You should be able to distinguish
between cost centres, profit centres and investment centres, as well as provide examples of
these types of responsibility centres in hotels. Through the learnings from this topic, you
should be able to suggest appropriate performance measures for managers of different types
of responsibility centres, and conduct a residual income analysis to assess whether decisions
made by a hotel’s GM are aligned with the strategic goals of the parent hotel company. You
should also be able to explain how and why a budget is an essential management tool for
facilitating control in hotels, and you should have an appreciation of some of the side effects
of budgets and the budget-setting process. You should have a grasp of how forecasting
informs budgeting, and what sources of information need to be considered for developing an
effective and accurate forecast of future sales. Through the learnings from this topic, you
should be able to distinguish between different types of budgets, and you should develop an
awareness of the complexity of the budget-setting process in hotels. Finally, you should also
be able to create simplified production, purchase and direct labour budgets for an individual
responsibility centre in a hotel.
7.0 Introduction
Topic 7 explores the cost management issues that are highly relevant to the tourism &
hospitality industries. In particular, you will learn about five major cost classification systems
that are designed to strengthen internal control and optimise management decision-making.
The nature of the decision that you need to make as a manager, or the environment that you
need to control, will change how you view different costs in different situations. This
workshop focuses on the internal control issues, and the decision-making issues, that arise in
hospitality and tourism businesses and will help you to understand how cost information can
be adapted to suit the needs of the particular management situation that is in front of you.
The mini-topics included with Topic 7 are:
7.1 Classifying Cost Information for Decision-Making
7.2 Outlay Costs vs. Opportunity Costs
7.3 Direct Costs vs. Indirect Costs
7.4 Variable Costs vs. Fixed Costs
7.5 Controllable Costs vs. Non-controllable Costs
7.6 Incremental Costs vs. Sunk Costs
Learning Outcomes
By the end of Topic 7 you should be able to:
 Explain five major cost classifications that are useful for control and decision-making in
hospitality and tourism businesses
 Suggest and apply a rationale for allocating indirect costs to individual departments in
hotel case examples
 Conduct analyses to estimate the proportion of fixed and variable costs incurred by a
hotel department
 Evaluate short-term pricing decisions and the profit impact of off-season operations
based on analyses of fixed and variable costs
 Appraise outsourcing decisions based on analyses of incremental and sunk costs

7.1 Learning Material

7.1 Classifying Cost Information for Decision-Making
This mini-topic introduces you to the idea that there are many different ways to classify costs,
and these different cost classifications are useful in different internal control and decision-
making scenarios. You will consider a range of different scenarios where cost information,
appropriately presented and analysed, can enhance financial and operational outcomes.
7.2 Outlay Costs vs. Opportunity Costs
This mini-topic explains the difference between outlay costs and opportunity costs.
Information about outlay costs and opportunity costs is useful when deciding between
mutually exclusive options, and this concept is demonstrated in a practical hotel-based
example.
7.3 Direct Costs vs. Indirect Costs
This mini-topic considers how the allocation of direct and indirect costs can impact on the
performance evaluation (and thus motivation) of a departmental manager in a hotel.
Managers of profit centres are often evaluated on the direct costs incurred by their
department, and not the indirect costs, as the indirect costs are often outside of their control.
However, those indirect costs still need to be considered when making decisions about
pricing. The revenues generated from the sale of products and services need to cover indirect
expenses before an overall profit can be made for the business. This mini-topic presents a
practical work example, in a casino hotel, and you will learn how to allocate indirect costs
directly to hotel departments according to various rationales. You will see how the allocation
of indirect costs can turn a reported departmental profit into an operating loss, and this mini-
topic also considers some of the non-financial factors that impact on decisions to continue
operating a loss-making department in a hotel.
7.4 Variable Costs vs. Fixed Costs
This mini-topic demonstrates the utility of understanding which costs are variable and which
costs are fixed. Decisions about short-term pricing, and whether or not to trade during the
off-season, are informed by cost data that identifies the fixed and variable components of
expenses. It is not always straightforward to know the exact proportion of fixed and variable
costs ahead of time, so this mini-topic demonstrates a simple technique for estimating the
split between a hotel department’s fixed and variable costs. You will also learn how to
conduct incremental analyses using information about fixed and variable costs – and you will
see how these analyses can inform decisions about whether to accept a lower price/room
rate in the short-term, or whether the decision to close operations during off-season will have
a positive impact on overall profit. As always, non-financial factors also need to be considered
when making such decisions, and this mini-topic also touches on these qualitative aspects.
7.5 Controllable Costs vs. Non-controllable Costs
This mini-topic helps you to understand the importance of differentiating between
controllable and non-controllable costs, and highlights how the inclusion of such costs in a
manager’s performance evaluation can impact on the motivation of that manager.
Controllable and non-controllable costs are most relevant to the concept of responsibility
accounting.
7.6 Incremental Costs vs. Sunk Costs
This mini-topic presents decision-making scenarios where it is useful to analyse additional
costs that would be incurred or saved as the result of a particular course of action (i.e.,
incremental costs), and costs that occurred in the past and cannot be reversed (i.e., sunk
costs). You will learn how to analyse incremental and sunk cost data to inform the decision to
outsource a central business activity (e.g., housekeeping, bakery/pastry production, laundry
etc.). As with all strategic decisions in tourism and hospitality, financial information cannot be
the only basis of evaluation – this mini-topic also considers some of the non-financial factors
that would also need to be weighed up when making outsourcing decisions.
Summary
After viewing each of the mini-topic videos for Topic 7 you should now be able to explain five
major cost classification schemes, and how these classifications present cost information that
is useful for different decision-making and internal control scenarios that are common in the
tourism and hospitality industries. You should be able to conduct appropriate analyses based
on cost information, including allocating indirect costs to individual hotel departments,
estimating the proportion of fixed and variable costs incurred by a hotel department,
evaluating short-term pricing decisions, identifying the profit impact of off-season operations,
and appraising outsourcing decisions. You should also be able to interpret the results of your
analyses in terms of the impact on strategic objectives and identify non-financial factors that
also need to be considered when making decisions based on cost and profit information.
7.2 Workshop Preparations & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Cost Issues in Tourism &
Hospitality", you should attempt the learning activities included in the Excel Workbook for
this topic BEFORE you attend the workshop. Come prepared with your questions about the
mini-topics and/or the workshop tasks, and we can all learn from each other during the
interactive workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.
8.0 Introduction
Topic 8 also considers factors that affect pricing decisions for tourism and hospitality
businesses, and briefly introduces the concept of revenue management. You will learn
common techniques for setting menu prices and room rates on cost information. You will
apply these techniques and approaches to hospitality case examples and also consider non-
financial factors that are relevant to pricing decisions for tourism and hospitality operations.
The mini-topics included within this Topic are:
8.1 Factors Affecting Pricing in Tourism & Hospitality
8.2 Food & Beverage Pricing
8.3 Room Rate Pricing
8.4 Revenue Management
Learning Outcomes
By the end of Topic 8 you should be able to:
 Explain how the concepts of price discretion, price elasticity and perishability affect
the pricing decisions of tourism and hospitality managers
 Calculate the elasticity of demand for hospitality and tourism case examples
 Apply the cost-plus (mark-up) method of menu item pricing to food & beverage case
examples
 Suggest room rates based on an analysis of cost information and other hotel/room
attributes
  Explain the concept of revenue management, including industry characteristics that
are conducive to the application of revenue management techniques.

8.1 Learning Material

8.1 Factors Affecting Pricing in Tourism &
Hospitality
This mini-topic considers why pricing is a challenging and complex decision-
making area for managers of hospitality and tourism businesses, and
introduces three important factors that affect the pricing decisions of tourism
and hospitality managers: price discretion, price elasticity of demand, and
the perishability of products and services. You will also learn how to calculate
the elasticity of demand for hospitality case examples.
8.2 Food & Beverage Pricing
This mini-topic covers common approaches to price-setting in food & beverage operations,
with a particular focus on the cost-plus method, also known as the mark-up method. You will
learn how to apply a mark-up to a costed menu item, and you will explore different
approaches to the mark-up method depending on how many ingredients are included in the
costing. This mini-topic also explains the relationship and difference between a mark-up ratio
and a gross profit ratio.

8.3 Room Rate Pricing

This mini-topic demonstrates three common approaches to deciding on what room rate to
charge. Each of these three approaches is based on an analysis of different types of cost
information and other hotel/room attributes. You will apply each of these techniques to hotel
case examples. While this mini-topic is focused on calculating room rates based on
quantitative data, you will also consider the flaws in these cost-based approaches and think
about qualitative and non-financial factors that need to be evaluated when setting room
rates.
8.4 Revenue Management
This mini-topic introduces the concept of revenue management and explores how revenue
management is a particularly applicable strategy for tourism and hospitality businesses. There
are certain characteristics of the tourism and hotel industries that are conducive to applying
the principles of revenue management, and these are explained in this mini-topic. You will
learn how dynamic pricing is more effective than fixed (static) pricing, and you will consider a
few different scenarios where the objective of maximising room revenue can be applied to
future decisions about room rates to accept or not to accept.
Summary
After viewing each of the mini-topic videos for Topic 8, you should now understand how the
concepts of price discretion, price elasticity and perishability affect the pricing decisions of
tourism and hospitality managers. You should be able to calculate the elasticity of demand for
hospitality and tourism case examples and apply the cost-plus method of pricing to food &
beverage case examples. You should also be able to suggest room rates based on an analysis
of cost information and other hotel/room attributes and also be able to explain flaws in
approaches to pricing that only consider cost information. Finally, you should be able to
explain the concept of revenue management, including industry characteristics that are
conducive to the application of revenue management techniques.
8.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Room Rate & F&B Pricing",
you should attempt the learning activities included in the Excel Workbook for this
topic BEFORE you attend the workshop. Come prepared with your questions about the mini-
topics and/or the workshop tasks, and we can all learn from each other during the interactive
workshop.

9.0 Introduction
Topic 9 covers concepts and techniques involved in cost-volume-profit analysis, which is a
management accounting approach to projecting future levels of profitability, given certain
volume and cost information. Of particular relevance to cost-volume-profit analysis is the idea
of contribution margin, which has only been mentioned briefly in other topics up to this
point. You will learn how the contribution margin layout of an income statement separates
out variable costs from fixed costs, and how this separation of fixed and variable costs is
useful in determining the breakeven point where total revenue and total costs are equal to
each other. The videos in this topic show you how to conduct analyses that determine how
many units of sale are required in order to reach the breakeven point, as well as analyses to
determine how many sales are required to exceed breakeven and make a certain level of
target profit, and you will get the opportunity to practice these analyses on hospitality case
scenarios that are common in the industry.
The mini-topics included with Topic 9 are:
9.1 Overview of Cost-Volume-Profit Analysis
9.2 Breakeven Analysis
9.3 Target Profit Analysis
Learning Outcomes
By the end of Topic 9 you should be able to:
 Describe the primary focus of cost-volume-profit analysis
 List common hospitality/tourism scenarios where a manager could use cost-volume-
profit analysis to project the impact on future profitability
 Explain the concepts of contribution margin, contribution margin ratio and break-even
point
 Apply the contribution margin layout to a traditionally formatted income statement
 List the assumptions of cost-volume-profit analyses
 Conduct break-even and target profit analyses on hospitality and tourism case
examples
9.1 Learning Material
9.1 Overview of Cost-Volume-Profit Analysis
This mini-topic introduces the primary basis and purpose of cost-volume-profit analysis, and
considers scenarios where this analysis is useful when managers are faced with certain
questions about the future profitability of their planned initiatives. You will learn about the
concept of ‘contribution’, which is essentially about covering fixed costs. Up to this point in
the course, we have typically looked at income statements presented in a traditional format –
this mini-topic demonstrates how to apply a contribution margin layout to an income
statement, and explains why the contribution margin approach is fundamental to cost-
volume-profit analysis. You will learn how you can make some basic predictions about future
profitability at various sales levels, if you can pinpoint which costs are fixed, and which costs
are variable
9.2 Breakeven Analysis
This mini-topic first explains the concept of a breakeven point, and then demonstrates how to
answer the question: how many units need to be sold in order to meet the breakeven point?
Answering this question requires information about the contribution margin per unit of sale,
and this information can be applied to determining how many sales units are required to
meet breakeven, as well as what the total revenue is at the breakeven point. You will learn
how to apply breakeven analysis to various hospitality case scenarios, including where only
one type of service is sold (e.g., woodfired pizzas), and where multiple different services are
sold (e.g., hotels with different room types or hotels with different room types as well as meal
options).
9.3 Target Profit Analysis
This mini-topic extends the principles of breakeven analysis to include the additional revenue
(on top of breakeven revenue) that is required to meet a certain target profit. You will learn
how to calculate the required number of sales units to meet both before-tax profit targets
and after-tax profit targets, and you will get the opportunity to apply these techniques to
hospitality case scenarios that are common in the industry.
Summary
After viewing each of the mini-topic videos for Topic 9, you should now be able to explain the
utility of cost-volume-profit analysis for answering important management questions about
future profitability in various scenarios. You should be able to explain the concepts of
contribution margin, contribution margin ratio and break-even point, and apply the
contribution margin layout to a traditionally formatted income statement. You should be able
to list the assumptions of cost-volume-profit analyses in order to avoid major violations of
these assumptions in your analyses. Finally, you should be able to use information on
contribution margin per unit of sale in order to conduct break-even and target profit analyses
on hospitality and tourism case examples.
9.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Cost-Volume-Profit
Analysis", you should attempt the learning activities included in the Excel Workbook for this
topic BEFORE you attend the workshop. Come prepared with your questions about the mini-
topics and/or the workshop tasks, and we can all learn from each other during the interactive
workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.
10.0 Introduction
Topic 10 focuses on managing the working capital of hospitality and tourism businesses. You
should remember from earlier topics that working capital is a measure of short-term stability
and is concerned with current assets and current liabilities. In this topic, you will learn more
about managing the main elements that comprise current assets and current liabilities: cash,
accounts receivable, inventory and accounts payable. You will consider how the cycle of
working capital impacts on cash management, as well as how seasonality creates volatility in
the asset base of hospitality and tourism businesses. This topic also explains the trade-off
between risk (financial stability) and return (profitability) of using current liabilities as a form
of finance. You will also learn more about the difference between profit and cash in this topic,
and you will apply techniques to prepare cash budgets, determine the optimal order quantity
for inventory, and evaluate the financial return of accepting an early payment discount from a
supplier.
The mini-topics included with Topic 10 are:
10.1 Overview of Working Capital Management
10.2 Cash Management
10.3 Accounts Receivable, Inventory, and Accounts Payable Management
Learning Outcomes
By the end of this topic, you should be able to:
 List the elements of working capital that need to be managed
 Explain the impact of the working capital cycle on cash management
 Describe the impact of seasonality on the asset base of a hospitality or tourism
business
 Appreciate the risk-return trade-off between profitability and stability of using current
liabilities for short-term financing
 Identify the difference between profit and cash
 Prepare cash budgets for hospitality case scenarios
 Apply techniques to determine the optimal order quantity of inventory
 Evaluate the financial return of taking an early payment discount from a supplier

10.1 Learning Material

10.1 Overview of Working Capital
Management
This mini-topic refreshes you on the working capital measure from previous
topics in this course, and identifies the main elements that impact on
working capital. The cycle of working capital is explained to demonstrate the
impact on the balances of cash, inventory, accounts receivable and accounts
payable. You will learn how seasonality impacts on the asset base of
hospitality and tourism businesses, and how the trade-off between risk and
return influences decisions to use current liabilities as a form of short-term
financing.
10.2 Cash Management
This mini-topic emphasises the difference between cash and profit and demonstrates how a
focus on profit and a lack of attention paid to cash flow can create a liquidity crisis for a
hospitality business. You will learn how to prepare a cash budget in order to project future
cash flows. By identifying when a shortfall of cash will occur, or when a surplus of cash will
occur, decisions can be made about financing to acquire more cash, or investing to generate a
greater return on assets.
10.3 Accounts Receivable, Inventory, & Accounts Payable Management
This mini-topic considers the trade-offs in decisions about managing accounts receivable,
inventory and accounts payable and reviews the asset turnover measures for these balance
sheet items that were covered in an earlier topic in this course. This mini-topic also introduces
other techniques for evaluating and optimising decisions about accounts receivable, inventory
and accounts payable, including the ageing of the accounts receivable schedule, the economic
order quantity (EOQ) for optimising the size of inventory orders, and calculating the annual
rate of return on an early payment discount offered by a supplier.
Summary
After viewing each of the mini-topic videos for Topic 10, you should now be able to explain
the elements of working capital that need to be managed and the impact of the working
capital cycle on cash management and other balance sheet accounts. You should be able to
describe the impact of seasonality on the asset base of a hospitality or tourism business, and
appreciate the risk-return trade-off between profitability and stability of using current
liabilities for short-term financing. You should be able to explain the difference between profit
and cash, and prepare cash budgets for hospitality case scenarios. You should also be able to
apply techniques to determine the optimal order quantity of inventory and evaluate the
annual rate of return of taking an early payment discount from a supplier.
10.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Working Capital
Management", you should attempt the learning activities included in the Excel Workbook for
this topic BEFORE you attend the workshop. Come prepared with your questions about the
mini-topics and/or the workshop tasks, and we can all learn from each other during the
interactive workshop.
11.0 Investment Decision Making
Topic 11 explores the importance of capital budgeting, as well as different techniques to
evaluate long-term investment proposals. Capital budgeting is the process used to allocate
funds to long-term investment proposals. In hotels, capital budgeting decisions involve things
like deciding whether or not to invest in the fixed assets required to run a laundry, or a
kitchen, or whether to upgrade rooms or add a conference facility to the hotel. As we have
often identified in this course, many businesses in the hospitality and tourism industries have
a high proportion of fixed assets, and thus, decision-making about investing in those fixed
assets will be a very important decision-making area for you as an owner or manager of a
tourism or hospitality business. In this topic, you will learn four common techniques that you
can use to evaluate the projected outcomes of competing investment projects: the accounting
rate of return, payback, net present value, and the internal rate of return. You will also
develop an appreciation of the benefits and shortcomings of each of these investment
appraisal techniques.
The mini-topics included with Topic 11 are:
11.1 Capital Budgeting
11.2 Accounting Rate of Return
11.3 Payback
11.4 Net Present Value
11.5 Internal Rate of Return
Learning Outcomes
By the end of Topic 11, you should be able to:
 Appreciate the importance and focus of capital budgeting
 Give examples of capital budgeting decisions in hospitality and tourism businesses
 Describe the benefits and shortcomings of investment appraisal techniques
 Evaluate projected outcomes of competing hospitality and tourism investment options
using a range of common investment appraisal techniques

11.1 Learning Material

11.1 Capital Budgeting
This mini-topic explains the concept of capital budgeting and highlights a
range of capital budgeting questions faced by hospitality and tourism
businesses. Previously, in this course, the budget focus was on the short
term. For capital budgeting, the focus is on the long-term. This video helps
you to understand the types of investment decisions you might be faced with
as an owner or manager of a hospitality or tourism business, given that
these businesses often have a high proportion of fixed assets (i.e.,
investments).
11.2 Accounting Rate of Return
This mini-topic introduces the accounting rate of return (ARR) as a technique for appraising a
potential investment. The ARR tells you how much profit an investment will return per year,
as a percentage of the value of the investment. This video demonstrates how to calculate an
ARR for an investment proposal, and the concludes by focusing on the shortcomings of ARR as
an investment appraisal technique.
11.3 Payback
This mini-topic demonstrates the payback technique for appraising investment options. The
payback period is the amount of time it takes until the initial cash outflow to pay for an asset
is recouped through the additional cash inflows generated by the investment. Payback is a
relatively simple technique to apply, yet it also has shortcomings. This video shows you how
to calculate payback periods for different hospitality and tourism scenarios, and also explains
the shortcomings of the payback method for appraising investment options.
11.4 Net Present Value
This mini-topic introduces the concept of net present value (NPV), which accounts for the
time value of money, and is usually the preferred investment appraisal technique for the
accounting profession. Essentially, cash that you have now has more value than the value that
same amount of cash will have in the future. Thus, if you want to compare future cash flows
generated by different investment options, you need to know how to appropriately discount
the value of today’s money. You can use information about the future value of cash inflows,
and the future value of cash outflows, to calculate the net present value of future cash flows.
When the value of cash inflows generated by an investment is less than the value of cash
outflows, an investment should be rejected. This video demonstrates how to calculate NPV
using standardised present value discount tables. You will learn the impact of different
discount rates and time periods and that sometimes you are interested in one single cash flow
at one point in the future, and sometimes you are interested in equal cash flows over a set
period of years (i.e., an annuity). With this information and understanding, you will be able to
project the NPV for investment options for hospitality and tourism case examples.
11.5 Internal Rate of Return
This mini-topic explains the internal rate of return (IRR) technique for appraising investment
options, which also considers the future value of cash flows. In contrast to the NPV technique,
the IRR approach produces a discount rate that can be compared to the company’s risk-
adjusted cost of capital in order to evaluate the investment options (note: the concept of risk-
adjusted cost of capital was covered in video for mini-topic 11.4). This video shows you how
to calculate an IRR for scenarios where the cash flows are equal across each year in the
investment period (i.e., an annuity). You will also consider the limitations of the IRR, and
understand whether to favour the IRR approach or the NPV approach.
Summary
After viewing each of the mini-topic videos for Topic 11, you should now understand that
capital budgeting has a long-term focus and is the process used to allocate funds to long-term
investment proposals. You should also be able to evaluate projected outcomes of competing
hospitality and tourism investment options by comparing the accounting rate of return, the
payback period, the net present value, and the internal rate of return. You should also be able
to explain the benefits and shortcomings of these investment appraisal techniques.
11.2 Workshop Preparation & Materials

Workshop Materials:
Now that you have reviewed the four mini-topics for the topic of "Investment Decision
Making", you should attempt the learning activities included in the Excel Workbook for this
topic BEFORE you attend the workshop. Come prepared with your questions about the mini-
topics and/or the workshop tasks, and we can all learn from each other during the interactive
workshop.
The Excel Workbook outlines the learning activities for this topic (refer to the worksheet tab
titled "Workshop Guide"). You should attempt the workshop tasks BEFORE you attend the
workshop so as to get the most out of the workshop.