Activity-based Costing

Applicability in Services: Case Study in Hotel

What is ABC costing? And how it differ from traditional?

INTRODUCTION

Introduction
Total Costs Direct Materials Direct Labor Overhead
Direct Tracing Driver Tracing Allocation
Direct Tracing Direct Tracing Direct Tracing

Plant Cost Pools

Unit-based Driver

Product/Service Traditional Method

PRODUCT/SERVICE Activity-based Costing Method

Applicability of ABC in Services

OBJECTIVES OF STUDY

Objectives
To define costing method currently applied in a company

1 2
3

To propose the use of ABC approach in the company

To identify the advantages of using ABC approach

A Case Study in A Hotel

COMPANY BACKGROUND

Company Background
General Manager
Personal Assistant

Room Division Manager

Finance & Administration Manager

Human Resource Executive

Chief Mantenance Officer

Food & Beverage Executive Food & Beverage Supervisor Food & Beverage Captain Waiter & Waitress

Head Chef

Sales & Marketing Executive

Front Office Supervisor

Housekeeping Supervisor

Chief Security Supervisor

Assistant Accountant

Administrative Assistant

Maintenance Officer

Assistant Head Chef

Sales & Marketing Coordinator

Front Officer Assistant

Housekeeping Assistant (Room) Housekeeping Assistant (Public Area)

Security Officer

Finance Assistant

IT Officer

Cook

Chief Steward

Storekeeper

Butcher

Steward

Landscape Assistant

Purchasing & Receiving Clerk Cost Control & Cashiering Clerk

Commis

Staff Category Permanent Staff Contract Staff Part-time Staff Casual-permanent Staff

Position 0 49 Total

Fulfilment 0 54 0 25 79

Company Background
Subsidiary to Government-owned Company
-To expose students to the world of hospitality -To create job opportunities -To create profit Objective

Lodging
Decision Making

Banqueting

Seminar Rooms Meeting

Standard Rooms
Financial

Dinner

Any disbursement -Observe by Bursary of its main Company -Bursary responsible in verifying any expenses & activities

Suite 1

Wedding

Seminar

Suite 2
Financial sources i. Income from services ii. Gov grants (provided yearly)

Costing Approach
Total Costs

Variable Costs
Direct Tracing

Fixed Costs

$ room/night

This is how The Hotel currently compute cost for Standard Room (refer Table I). To find cost room/night, they simply divided total cost by day usage (300 days) and summed up all the costs. Product/Service Traditional Method This is apparently a traditional method! After computing the cost of room rates, managers will sit in a meeting. Cost room/night will determined by their consent.

A Case Study in A Hotel

APPLYING ABC

Methodology
Interview

Interview key people in financial department To collect information regarding costing approach currently applied in The Hotel

Data

The Hotel only providing us costs for standard rooms Confidentiality factors

Observation

To discover activities involved in performing lodging activities Time constraint

Limitation!

Methodology
Due to these limitations, we are not having enough data to calculate costs for Standard Room using ABC. Thus, we cannot see the different and comparing total costs of both methods.
Time Constraints

Confidentiality

We proceed this study by proposing ABC framework for The Hotel (to be specific on lodging because the data obtained is on Standard Room) and delineate information required in performing ABC.

ABC
Direct Materials Direct Labor Overhead
Direct Tracing Driver Tracing Allocation Direct Tracing Direct Tracing

1st We group the costs based on category of DM, DL and OH (refer Table II). Costs for DM & DL can be trace directly for room/night. 2nd To allocate OH costs, we have to discover overhead costs incurred, activities involved in lodging and find appropriate cost driver.

Plant Cost Pools

Unit-based Driver

PRODUCT/SERVICE Activity-based Costing Method

ABC
Before After

survey

Check-in

Register

Accommodation

Foods/Beverages

Check-out

Follow-up service

Basic flow for lodging customer

Main activities involved in lodging services

Front Office
Reservation Check-in, check-out Opening & closing customer account

Housekeeping
Cleaning Making beds Vacuuming Replenishing linens & other stuffs

Foods & Beverages Preparation

Preparing foods breakfast, lunch, dinner Taking orders Cooking Preparing kitchen & restaurant Serving Cleaning kitchen

Marketing
Arrange visits Giving information Advertisement

ABC

ABC
Allocation of resource cost to activity cost pools
Costs of Resources for Lodging Cleaning & Laundry

Depreciation

General

Facilities

Purchasing

Storing

Maintenance

Depreciation on building

Administration, finance, accounting department

Estimated time spent (# hours)

Electricity, water

Linens, clothes, towel

Goods

Goods

Service

Resource drivers

Space Area (# square meter)

Space Area (# square meter)

Cleaning Hours (# hours)

Number of orders (# orders)

Space occupied (# square meter)

Estimated time spent (# minutes)

Refer Table III

Activity Cost Pools

Front Office

Housekeeping

Foods & Beverages Preparation

Marketing

ABC
Allocation of costs of activity cost pools to types of rooms
Activity Costpools
Foods & Beverages Preparation Number of Covers

Front Office

Housekeeping

Marketing

Activity Cost Driver

Number of arrivals

Number of nights

Number of Visits

Refer Table IV

Types of Room

Standard Room

Suite 1

Suite 2

A Case Study in A Hotel

CONCLUSION

Finding
Many managers concern the advantages of using ABC compare to traditional approach While the others refused for ABC because of its complexity and time consuming

But, most of them believed that ABC is practicable only to production not services

ABC is costly in implementing the approach, and require frequent updates

Conclusion
Above all, ABC method is not difficult as many managers think As long as they understand the concept, know where to start, hoe to implement & maintain the process ABC system will definitely valuable and handy method Above and beyond, ABC will benefit the hotel with relevant cost information and ease the process of decision making

There is no wrong in practicing the traditional method But, computing more accurate data is a root to better decision making As a matter of fact, a good decision making in short-tem can be a determinant of sustainability of the hotel in a long term

Recommendation
Find a company that can give full cooperation
To provide costing data So, can differentiate total costs incurred by both methods

Do observation to discover real activities involved in the company

Find another services firm

Other than hospitality sector Other than hotel

Specific time period

Plan appropriate time period to collect data and perform observation To ensure accuracy in data collection

Thanks for your attention!

Q&A SESSION