Finance and Funding in the Travel and Tourism Sector
Table of Contents
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- Task 1 (LO1)
- Concept of Cost
- The Methods of Costing
- Absorption Costing
- Variable Costing
- Marginal Costing
- Advantages and Disadvantages
- Break-Even Point
- Pricing Methods
- Task 2(LO2)
- Objectives of Budget
- Plan to Establish Company
- Task 3 (LO3)
- Profitable Ratio
- Profitability Ratios
- Task 4 (LO4)
- Sources of Finance
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Tourism is the act whereby a person living in given geographical area travels to another place or places away from his or her usual habitation or residence. The person must travel to a different area or areas of importance for the purposes of education or taking a break. It is either a communal, cultural or commercial activity. Tourism can take place domestically, nationally or internationally. It is regarded as a significant social and economic activity at the global and local levels. Travel is the act itself in relation to tourism. It is an activity that is practical in nature, where a person has to move actually for the sake of touring places. An individual has to experience it in order to observe and learn the different cultures or sceneries available at the different geographical places presented to him or her in the different parts of the country or the world. This travel part takes different forms, including the air, road and water. These three modes of movement have their different aspects and classifications. The air part has airlines that are classified in terms of private, charted and public planes (Barros & Peypoch 2009). The water classification has cruise ships and boats. Road travel has been classified as coaches, private cars and rail transport system. A tourist will have to choose the means which is suitable for his destination and economic status (Hayward, Marvell & Reynolds 2005).
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Finances are the actual cash required to support the expenses an individual is expected to spend while traveling and touring to the given learning and holiday destinations. Finances can also relate to the expenditures expected to support the travel and tourism industry in the form of maintaining and expanding the available facilities for the tourists. Each sector has different budgets expected to support their continued existence over time for the benefits of the next generations. Funding, on the other hand, is the expected support from the given stakeholders in the travel and tourism sector to boost its continued existence. Funding can be either local or global. Each given body or individual has its own role in the funding process. This process generates finances that equip each sector in the industry to run apart from the charges posed onto the tourist during their travelling and touring activities.
British Airways are ranked as one of the largest airline enterprises worldwide. They offer their services globally. The company was established in 1974 as an airline to offer services following the creation of the air travel laws and bodies. It has become a privately owned enterprise after its privatisation. It is the leading air company in the United Kingdom and the second largest airline in the world. It offers services to over 200 global destinations. In 2004, it was established that it provided services to a market comprising of almost 36 million travellers and tourists globally, who chose to travel with the help of this airline (Sloan, Legrand & Chen 2013). Its main operating base is in London, where it has set up two airports including Heathrow and Gatwick. The airline further offers cabin services ranging from economy class to club world (Jarvis 2014).
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The vision of this company is to ultimately become the world’s leading global premium airline. In order to attain this vision, it has designed some strategies and objectives. One of such objectives is to become the airline that every traveller would prefer. Besides establishing their offices in the key cities worldwide, it also aims at providing outstanding services. Above all, its key objective is to ensure that the crew meets the customer’s needs by providing services that will also be profitable for the firm (Vasigh, Tacker & Fleming 2008).
Task 1 (LO1)
Concept of Cost
Cost refers to the amount of money or expenses that are either notionally or actually incurred or attributed to a specific business act (Banerjee 2006; Mitra 2009). According to the Indian Institute of Cost and Work Accounts (ICWA), cost is considered as the measurement in terms of monetary terms. It is also defined in monetary terms as the amount of resources used for the purpose of production of goods or services being offered. The basic concepts of cost elements entail material, labour and expenses (Debarshi 2011).
The Methods of Costing
The approaches to costing are classified in the following way:
a) Unit costing or single output costing
This category of costing is practiced when the given products of a given firm are expressed in matching quantitative units. It is effective when the products being offered are manufactured as an unremitting production activity. The costs to be incurred are simply identified through ascertaining the convenient units of the expected or produced output.
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b) Job costing
Under this type of costing method, the different costs are calculated and ascertained through the work orders that are issued separately. Each work order is considered as independent of the other with its own scope and specification. The costs anticipated for each output from a given job are calculated and determined separately as costs for the given job and ascertained as a true record of expected results for the future (Gupta, Sharma & Ahuja 2007).
c) Batch costing
Under this method, the costing is done whereby the given units of the company or enterprise that are produced in a specific batch are considered uniform in their designs and nature. When this type of costing is applied, each batch will be treated as an individual job or separate unit for the purpose of calculations.
d) Contract costing or terminal costing
This method of costing is applied whenever the business is involved in bigger jobs that require big expenditures for long periods of time and the business has different working office sites. The business in such a scenario treats each contract as an individual unit that requires specific costing (Gupta, Sharma & Ahuja 2007).
e) Operating costing or service costing
The costing applied by this method is initiated when a business is expected to drive the costs of a particular service offered by the company as a single unit. The different services offered are treated as separate units that require operating costing.
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f) Process costing
This method of costing is applied in businesses when the given products offered are expected to go through several different processes. Each cost in the given process is considered and calculated as an individual unit of operation. The given unit costs are considered to ascertain the cost values at each stage before they are accumulated to be determined as a sum of the whole process (Hansen, Mowen & Guan 2007).
g) Multiple costing
This mode comes into place when procedure costing is involved. Distinct units involved in process costing are calculated under this method to determine the total cost of the whole process required to sell a product in the market.
h) Uniform costing
Here, the preferred method of costing is not related to the relationship between a similar business and different subsidiaries being ascertained upon their costs concerning the application of different methods. The methods agreed upon in this costing method will determine different approaches used to set the business running for the future, depending on the outcome of the costs incurred (Hansen, Mowen & Guan 2007).
A company is required to have good costing methods for its own benefits and future continuity of offering the available services and expansions. The factors that are determined by costing will entail maintenance of the company, hiring or firing of workers, business expansions and daily running of the business (Hirschey 2008). Maintenance plays a big role in relation to the continuity and survival of the company. When a company makes the right steps towards costing of its products and receiving profits at the same time, it will be in a position to set aside its finances and maintain its older structures. Such ideologies also affect the expansion of the company (Khan & Jain 2007). Hiring or firing of workers is also determined by the costing methods (Du Toit, Hopkins, Qua-Enoo & Riley 2007). Proper costing methods provide room to hire more workers to improve the efficiency of the timely service and product delivery. The daily activities also require the services of proper costing methods. Any business has different demands during the process of its daily operations. Such demands need to be balanced by proper costing to keep the machines and workers running (McIntosh, Clarke & Frew 2010).
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This is a method where fixed and variable costs associated with the production process and apportionment of individual products or services are accumulated (Weygandt, Kimmel & Kieso 2009; Warren, Reeve & Duchac 2014). This costing technique accounts for the changes in both fixed and variable costs (Mitra 2009). The key costs concerning products or services under this costing system include the following:
- The direct labour cost, where the company’s costs are geared towards constructing a product;
- The direct materials costs, where the materials available are used to produce finished products;
- The variable manufacturing overhead costs, where the costs of operating a manufacturing facility vary according to the production size;
- The fixed manufacturing overhead costs, where the costs of operating a manufacturing facility are not varying with the production size (Rajasekaran & Lalitha 2010).
This is the cost that varies in relation to the changes in the volume or size of the activity (Srivastava 2011).
The variable costs entail the following:
- The direct material costs, which are to be when associated with the products or services sold;
- The commission incurred, since the sales personnel earns its commission when a given sale transaction is completed;
- The billable labour incurred, since the given wages associated with the billable periods are charged when the expected sales are complete;
- The rate of labour that the employees are paid, considering the number of the production units made in a given process (Swarbrooke & Horner 2007).
This is an accounting arrangement whereby variable costs are charged to cost elements and fixed elements of the time that are written off in totality against any collective contribution. This technique recognizes cost behaviour and assists in decision-making. It is also known as a contribution approach or direct costing (Balmer, Stuart & Greyser 2009). Fixed cost is not included in marginal costing, because it hinders its position and the following business decisions. A given business has to make decisions considering the given challenges that it may face while operating. Such priorities are not considered in fixed costing. Fixed costing does consider the unchanged variables, even though it is unclear which ones exactly (Gupta, Sharma & Ahuja, 2007). Such an approach has been considered important. Hence, fixed costing lacks a truly open-minded approach towards business decision (Shim & Siegel 2009).
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Advantages and Disadvantages
Advantages of Costing
- It enables business to determine the exact expenses;
- It enables a company to plan for any changes in the variable costs;
- It promotes proper records keeping;
- It enhances the accountability of workers.
Disadvantages of Costing
- Some systems are too expensive to apply;
- Some systems require to be applied to a large businesses to be efficient and affordable.
This point is defined as the sales capacity at which an enterprise earns exactly no money. This point is useful because of the following reasons:
- It determines the amount of the remaining capacity after the breakeven point is reached. This data informs about the maximum sum of profit that can be made;
- It establishes the impact on profit if fixed cost replaces with variable cost;
- It enables to determine the change in profits if product prices are altered (Cafferky & Wentworth 2010).
It is a technique used to determine the prices and the overall pricing strategies. They include the following:
- Targeted return;
This is a managerial accounting system that is concerned with the influence of product costs sales volume on the operating profit. Its task is to deal with how operating profits are affected by the changes in the variable costs, fixed costs, selling prices per unit and the sales assortment of two or more unlike products available.
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The CVP formula is: px = vx + FC + Profit
In the stated formula,
p is the price per unit;
v is the variable cost per unit;
x is the total number of units made and sold; and
FC is the total fixed cost.
Objectives of Budget
The budget is meant to inform the stakeholders of the company whether the business is making profits or not. Correctly done budget also guarantees that other investors will invest in the company for the benefit of a bright future. The budget also determines when the company will be in a position to acquire more funds. When the management team of a company establishes a budget, it also determines the sources of income to run the company (Weygandt, Kimmel & Kieso 2009).
Plan to Establish Company
The plan to start a company is based on the 6Ms, which entail money, material, machinery, market, men, and make-up. The company requires enough capital to be started and ran without shutting down. The money can be either in the form a loan or personal account. The availability of raw materials must be ensured at low cost to start the company. The machinery to support the processing of the products and ideas must also be up-to-date to ensure the delivery of proper products and services. The availability of manpower is another crucial element that is required for the support of the company. Make-up opportunities to upgrade the system are other crucial requirements. For a firm to be up and running over an extended period without any misfortunes, these elements must be in place (Daft 2009).
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Task 3 (LO3)
This is a measure of profitability that measures proper performance of the company. The profitable ratios include return on equity (ROE), return on sales (ROS), gross profit margin (GPM), return on investment (ROI), return on assets (ROA) and operating margin (OM) (Daft & Marcic 2012).
|Less cost of Revenue|
|Less Selling cost||(436)||(466)|
|Gross Profit Ratio||9.7%||6.8%|
In the above table of the profitable ratios:
- The revenue for 2012 was more than that for 2011;
- The expenditures for 2012 were higher as compared to 2011;
- The gross earnings for 2011 were greater than those of 2012;
- The gross ratio profit for 2011 was more than that for 2012.
The aims of calculating the gross profit ratio serve:
- To show how good a firm is in running its business;
- To show whether the corporation’s production is improving or deteriorating;
- To know whether a company is making money;
- To compare a company’s profits with other companies (Daft & Marcic 2012).
The British Airways company, according to the available statements, has made considerable percentages of profits. The company has managed to pull some percentage profit despite the increased in expenses from 2011 to 2012. The increased expenditures can be attributed to the general variables that affected all business in the global scene (Gopal 2011). Although, the is heading towards a better direction considering the challenges it faced, as it still made a higher gross profitable ratio. The management team can recommend to the stakeholders a positive apprise at the end of the coming years if the expenses concerned with running the business can be minimised and profits can be increased (Gopal 2009).
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Task 4 (LO4)
Sources of Finance
Sources of finances are the available means for a company to acquire funding to run its operations (Morrell 2013). The establishment entails both external and in-house sources of finances. These sources include the following:
- Share capital, share premium
This from of the profits is gained from the running of the business across the globe, when the liabilities and expenses have been deducted.
- Sale of assets and right issues
The institution has sold some of its assets, including the old planes and shares, to the interested members of the public. Such a step has encouraged the availability of finances from the internal part.
Well-wishers have also been a source of finance for the company in the form of donations. Different groups of persons and bodies have donated money to fund the organisation and its operations.
- Returned profits
The company has also made profits from running of the business.
- Loans from financial institutional
The company has acquired loans to support its operations of expansion and purchase of long-term investments.
- Leasing of airfields
The company has gained finances to run its business from leases it has issued to other international airlines to use its property for the parking private and chartered planes (Leiper 2004).
The distribution of resources in the public domain of the tourism sector is based on the availability of people to visit a given area and travel using a given means of transport. Each sector is supported with sufficient funds for the maintenance and daily activities (Ferrell 2013).
The British Airways have different challenges of business nature that affect its business at the end of each financial year. The changes in variable and fixed costs affect its profits (Burke & Litwin 2009). It has been shown how different business terms are used by the society to describe how a big business is affected by business conditions and fulfilment ranging from costing to pricing in relation to tourism and traveling sector. The British Airways had a major boost, especially in the travelling sector, considering that it reaches different destinations across the world. Every person can have a chance to travel with this airline, as it aims to support its services so that they acquired by most travellers.