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The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0959-6119.htm

Customer profitability analysis with time-driven activity-based costing: a case study in a hotel

Ilhan Dalci

Eastern Mediterranean University, Famagusta, Turkey

Veyis Tanis

Business Administration, C¸ ukurova University, Adana, Turkey, and

Levent Kosan

Silifke Vocational Business School, Mersin University, Mersin, Turkey

Abstract

Purpose – The purpose of this paper is to show the implementation of customer profitability analysis (CPA) using time-driven activity-based costing (TDABC), in a Turkish hotel. Design/methodology/approach – A case study was conducted in a four-star hotel with 100-room capacity in the C¸ukurova region of Turkey. Interviews, direct observations, and documentation collection were used to collect the data. Findings – The results showed that some of the customer segments which were found unprofitable under the conventional ABC method were determined profitable using TDABC. The case study also revealed the cost of idle resources devoted for front office, housekeeping, food preparation, and marketing activities. Research limitations/implications – Only a single hotel operating in Turkey is examined in this paper. Further research should focus on implementing CPA using TDABC in other hotels in Turkey and abroad. Practical implications – Based on the results of the study, the hotel management is better able to understand profitability of different customer segments and implement appropriate strategies. Moreover, the time equations of TDABC are considered to provide hotel management with an opportunity to better balance the capacities supplied in departments. Originality/value – There is limited research relating to profitability analysis in service companies in general and in the hotel industry in particular. Therefore, this paper is unique in the sense that it analyzes the use of TDABC systems for CPA within a real case hotel.

Keywords Activity based costs, Profit, Customers, Hotels, Turkey

Paper type Case study

1. Introduction Customer cost information is essential for managerial decision making. Therefore, understanding true costs of serving specific customers is important in any organization. Companies that understand which customers are more profitable and which ones are not, are armed with valuable information needed to make successful managerial decisions to improve overall organizational profitability (Raaij et al., 2003). Cotton (2005) and Cooper and Kaplan (1991), also suggest that understanding how current customer relationships differ in profitability enables managers to make better managerial

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Received 15 April 2009 Revised 1 September 2009, 22 October 2009, 1 December 2009 Accepted 13 December 2009

22 October 2009, 1 December 2009 Accepted 13 December 2009 International Journal of Contemporary Hospitality

International Journal of Contemporary Hospitality Management Vol. 22 No. 5, 2010 pp. 609-637 q Emerald Group Publishing Limited

0959-6119

DOI 10.1108/09596111011053774

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decisions. However, obtaining accurate information about customer profitability necessitates the use of an appropriate costing system. Customer profitability analysis (CPA) entails allocation of revenues and costs to specific customers in a way that the profitability of individual customers can be calculated. Owing to the increased size and organizational complexity of service firms, Kaplan and Narayanan (2001) state that understanding CPA is especially important for service companies. Indeed, for service companies, CPA is more important than production companies because the cost of providing a service is generally determined by customer behavior. According to Zeithaml and Bitner (1996), the cost of finding and gaining a new customer in service companies is five times greater than the cost of retaining current customers. Therefore, successful implementation of CPA in order to retain profitable relationships with current customers is essential for service companies. Moreover, Cotton (2005) asserts that the effective use of CPA enables service companies to increase customer satisfaction and boost profitability. According to Cooper (1988), the use of activity-based costing (ABC) enhances the traditional contribution margin approach and the quality of CPA. The ABC system was promoted by Cooper and Kaplan in the mid-1980s, as an alternative costing system to the traditional one, based on their experiences with some production companies in the USA (Gunasekaran and Sarhadi, 1998). Subsequent studies dealt with the deficiencies of traditional costing systems in automated production environments (Innes, 1999; Baird et al., 2004). The activity-based approach to overhead costs is an extension of the traditional volume-based costing that treats manufacturing overhead as a complex set of costs with multiple cost-drivers (Drake et al., 2001). Rotch (1990) points out that the conditions necessary for manufacturing firms to successfully implement ABC are necessary for service companies as well. The ABC approach assumes that products or customers generate activities, and the activities consume resources (Cooper, 1988). ABC is based on a two-stage allocation process. First of all, the costs of resources are allocated to the activities using first-stage cost drivers, and then the costs of activities are apportioned to cost objects by means of volume and non-volume related drivers (Cooper, 1990). That is, the activity costs are allocated to the cost objects based on the relevant cost drivers (i.e. number of machine hours, number of setups, number of design specifications, and number of customer visits). The cost drivers are linkage between activities and cost objects (Cooper, 1988, 1990; Cooper and Kaplan, 1992). The rise of ABC has led to the understanding that not every customer consumes the same level of activities and resources. Moreover, resources that particular activities consume are measured in terms of cost driver units. This is due to the fact that, while traditional cost systems rely on arbitrary cost allocations of overhead costs, ABC classifies cost pools according to the activities (unit, batch, product, and facility levels) performed within the organization (Kaplan and Cooper, 1988). Understanding the hierarchical levels of the costs of ABC enables managers to better understand cost causation, and hence make better decisions. Thus, with ABC, managers are better equipped to understand which customers are profitable and which ones are not (Kaplan and Cooper, 1998). Additionally, according to Cooper and Kaplan (1992), the use of ABC by organizations has led to increased profitability. Despite the fact that the ABC system can be a sufficient costing method, it has some drawbacks. First, due to complexity of the activities performed within organizations, ABC may take too much time to be implemented (Kaplan and Anderson, 2004). Second,

when activities, that contain more than one subtask with different cost drivers, are intensified, ignoring that complexity may result in the misallocation of the costs. Third, since the ABC system needs to be updated regularly, it becomes too costly to re-interview and re-survey people engaged in the activities (Kaplan and Anderson, 2004). The downsides of traditional ABC system alerted Kaplan and Anderson to introduce a new costing method called time-driven ABC (TDABC) system to address the above-mentioned limitations. However, using TDABC in order to bring solutions to the problems of conventional costing systems does not mean that ABC should be completely abandoned. Proponents of TDABC argue that it removes time-consuming and costly interviews and surveys which have been a major barrier to the implementation of a traditional ABC system, as well as it allows cost driver rates to be calculated based on the practical capacity of the resources supplied (Kaplan and Anderson, 2007b). Under a traditional ABC system, the costs of activity-cost pools, are apportioned amongst cost objects using activity drivers (Kaplan and Cooper, 1998). On the other hand, under a TDABC system, these costs are allocated to the cost objects on the basis of time units consumed by the activities (Kaplan and Anderson, 2004). The TDABC approach requires identifying resources needed to perform the activities, as it is done under a traditional approach. It also requires time needed to perform the activities and the practical rather than the theoretical capacity of the resources supplied. Theoretical capacity equals the theoretically available working minutes, whereas practical capacity is expressed as the amount of time that employees can work without idle time (Kaplan and Anderson, 2007a). The practical capacity of the resources excludes the time that employees spend on activities (such as having a rest and taking a break) which are unrelated to actual work performance. Two important aspects of a TDABC system are:

estimating the practical capacity of the resources supplied and the cost of these resources. Dividing the total cost of resources supplied by the practical capacity yields the cost per time unit. Then, the time needed for performing the activities is multiplied by the cost per time unit in order to assign the costs to products or customers. With the help of the time equations of TDABC, the time needed to perform an activity can be estimated without any need to continually re-interview people. These time equations can include multiple time drivers if an activity is driven by more than one driver. Obviously, the TDABC approach, with its time equations, makes it possible to know how many minutes that staff members spend on activities in a particular time period. Therefore, the time equations of TDABC can provide larger transparency than a traditional ABC system. With TDABC, it is also possible to pinpoint which customers consume the largest amount of time and resources (Kaplan and Anderson, 2004). Research conducted on the analysis of costing systems, in the service industry in general and the tourism industry in particular, is very limited. There has also been little innovation regarding cost accounting practices in the hospitality industry (Potter and Schmidgall, 1999). Fay et al. (1976) demonstrated the use of conventional costing systems in the hospitality industry. Nordling and Wheeler (1992) implemented CPA in the Hilton Hotel in Las Vegas. However, analysis of the activities in allocating the overhead costs was not completed in that study. Although the use of ABC in the application of CPA in the hospitality industry has attracted little interest, there has been detailed research about costing practices in tourism enterprises after 1999. In a case study conducted in a hotel by Noone and Griffin (1999), activities were determined

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at macro and micro level and the cost of these activities were assigned to specific customers using ABC. Raab and Mayer (2003), surveyed restaurant controllers in the USA and they found that the use of ABC was almost non-existent in the restaurants. They also discovered that the use of ABC could be appropriate for the restaurants due to the characteristics inherent in the restaurant industry. Raab et al. (2005) tested a model for ABC in a buffet style restaurant in Hong Kong. Raab and Mayer (2007) analyzed how menu engineering (ME) can be integrated with ABC to determine whether or not the integration of ME with ABC can boost the profitability of a dinner buffet in a restaurant in Hong Kong. Ultimately, Raab et al. (2009) applied activity-based pricing in a restaurant setting. The findings of that study show that ABC could be used by restaurant managers to better analyze the cost structure of their restaurants. Nevertheless, there are many issues, relating to cost and management accounting practices in the hospitality industry, that deserve research attention (Pellinen, 2003; Dittman et al., 2008). Several researchers as mentioned above have advocated the use of ABC in the hospitality industry. However, the costs of activities have not been analyzed using TDABC in the hospitality industry even though this method has been applied in other industries. Pernot et al. (2007) used a case study in a university to show how to use a TDABC system for inter-library services. They argue that TDABC can improve the cost management of all library services because it enables library managers to take appropriate actions to reduce the time needed for specific requests of library customers. Everaert et al. (2008) described a case in a distribution company and showed that ignoring the complexity of activities containing more than one subtask with different time drivers, resulted in a misallocation of 54 percent of the costs when the traditional ABC system rather than a TDABC approach was used. In a recent study, Demeere et al. (2009) showed how to implement a TDABC model for five outpatient clinic departments through a case study. They uncovered that the use of a TDABC system provided the healthcare managers and physicians with valuable information which assisted them in operational improvements, making profitability analysis for departments, and deciding on future investments. The general aim of this paper is to show the implementation of CPA with TDABC in a hotel operating in the C¸ukurova region in Turkey. The case hotel is located in the city of Mersin. The city of Mersin is important for the region’s economy because trade among Turkey, the Middle East, and Europe takes place through the Mersin Port. Therefore, most of the businesspeople conducting business through the Mersin Port prefer to stay in the hotels which are located in the city. Thus, hotels have significant impact on the economic development of the C¸ukurova region. In that respect, implementing CPA successfully for accurate and effective managerial decision making is important for the managers of the hotels located in this region.

2. The case study and research design This study adopted both convenience and purposive sampling techniques to select the research sample (Altinay and Paraskevas, 2008). One of the co-authors of this study previously worked for the hotel to have experience during his summer holidays. Thus, he knew the managers and asked for permission to conduct a research of this kind. He met the hotel’s managers for a preliminary discussion and he realized that the case hotel was measuring customer profitability by using a traditional ABC system.

Then, he explained to the managers the benefits of conducting this case study in their hotel. The managers of the hotel accepted to give permission for the research with a condition that, due to confidentiality reasons, the hotel’s name should not be disclosed in the paper. This request was taken into account and the researchers commenced the study in the hotel and concluded it within one year. The physical and environmental information about the hotel is as follows: it is a four-star hotel operating with 100 rooms in the C¸ukurova region in Turkey. The hotel operates at an annual occupancy rate of 60 percent. In addition to a banqueting hall, steam bath, meeting room, bar, and business centre facilities, various other services which are suitable for four-star hotel standards are also offered in the hotel. The case hotel employs 53 personnel (one general manager, one assistant general manager, four front office clerks, seven housekeepers, 30 restaurant staff, two marketing personnel, three bartenders, two accounting personnel, and two human resource managers). Our study in the case hotel started in September 2006 and ended in September 2007. The data presented in this case study represent real figures gathered throughout the one-year period. All the data presented in this study are expressed in US$. The cost data were compiled during a three-month (September, October, and November) period in 2006. In order to compile consistent data regarding the time spent on the activities, needed for deriving the time equations used in the TDABC model, we observed the actions of the personnel while they were performing the tasks several times during the year of 2007. Additionally, we conducted follow-up interviews during the last three months of the study in 2007 in order to verify and validate the accuracy of the data. By comparing the results we obtained at different times, we computed the average times for each of the activities. Moreover, documentation was collected from financial reports in order to gain a rich description of the hotel’s costing system and to understand how managers implement CPA. All of the above-mentioned case study applications were conducted with the following theoretical background and literature. A qualitative research strategy was used as the most appropriate method for a case study of this kind because case studies are often associated with qualitative research design even though they can be conducted with both qualitative and quantitative research methods (Yin, 1994). According to Ryan et al. (2007), Lee (1999) and Yin (1994), case studies provide the researchers with an opportunity to understand the nature of accounting systems which are currently used in practice. Moreover, case studies could be used to explore the application of new procedures. As suggested by Yin (1994), case studies investigate a contemporary phenomenon in its real-life context and more than one case can be conducted at a time. Since the main purpose of our study was to understand the costing system currently applied and to evaluate the applicability of TDABC in a hotel setting, the case study method was deemed to be the most appropriate method to gain in-depth understanding of the hotel. In the study, a descriptive case study was first used in order to explicate the accounting system currently used in the case hotel. Then, we used an experimental case study method in order to evaluate the applicability of the new costing system (TDABC) in the hotel. We used qualitative research methods for gathering data regarding the costing method currently used by the hotel’s accountants, activities performed in the hotel, unit times needed for performing the activities, and detailed costs of these activities. Semi-structured interviews that lasted between 45 minutes and one hour with the personnel of the hotel (i.e. general manager, general assistant manager, cost accountant,

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receptionists, housekeepers, marketing personnel, and waiters), direct observations, and documentation collection were used as data-collection methods. Semi-structured interviews were chosen because they enable the researchers to understand the issues in depth (Bryman and Bell, 2007). The interviews were conducted based on a detailed interview schedule that was agreed upon with assistant general manager of the hotel. The interviewees were asked closed-ended as well as open-ended questions on issues relating to main activities performed in the hotel, the tasks performed by each staff member, type of costs incurred, and the customers of the hotel. The purpose of those interviews was to clarify how staff members performed their tasks and how much time (in terms of minutes) they spend on performing these tasks. Direct observations were also used to examine the activities while the staff members physically perform the tasks. As suggested by Tharenou et al. (2007), observations are important tools for understanding the procedures. In that respect, we conducted observations in order to ensure that the data gathered through interviews accurately reflected the real time experiences of the employees. After each visit to the relevant department, we wrote up notes in order to analyze the nature of the activities. We also documented the tasks performed by the staff members. All the interviews were recorded on tape, and the data obtained through these interviews were filed. We transcribed all tapes and notes and read the transcripts several times in order to make thorough activity analysis. The cost data were obtained from the cost reports documented by the accounting department. We used the cost reports to get an insight into the costing system currently employed by the hotel’s cost accountants (Tables I and II). We also utilized job descriptions in reviewing the tasks. In addition, we analyzed the annual reports of the hotel in order to analyze revenues generated from accommodation and other revenue generating areas, especially food and beverage spending. We developed time equations using the data concerning the tasks and unit times needed to perform these tasks. Based on the time equations that we formulated and the cost data provided by the accounting department, we allocated the costs to customer segments using TDABC. Ultimately, we computed profitability figures for the customer segments using TDABC and compared TDABC results to the ones found under the conventional ABC, as presented in Tables V and VI.

Customer segments of the case hotel The implementation process for CPA started with scrutinizing the current customer segments (groups) of the case hotel. The customers of the hotel were determined as follows:

Group 1. This group includes managers of local and foreign companies. The greatest share (48 percent) in the sales mix belonged to this group of customers. These customers generally utilized accommodation and food and beverage services.

Group 2. This customer group constitutes customers brought to the hotel by the travel agents operating both in internal and external markets. That group had the second highest sales mix percentage (19 percent). The customers clustered in this group utilized accommodation and food and beverage services.

Group 3. These customers represent people holding managerial positions in government-owned institutions. This customer group used accommodation and food and beverage services and had a 10 percent share in the total sales mix.

.

.

.

Banqueting

2,892 hours

(continued)

$177,106

$110,000

$37,400

$35,405

$22,505

$42,031

828.3 square

meters

$3,320

$477

4%

preparation

3,635 hours

Beverage

$178,466

$44,504

$22,848

$49,027

$26,700

966.2 square

meters

$4,980

$886

6%

preparation

2,737 hours

672 square

$114,747

$34,096

$38,400

$10,790

$33,511

$90,291

meters

Food

$446

13%

Marketing

$26,288

$54,977

$16,400

$9,960

$2,825

12%

Housekeeping

13,776 hours

1,660 square

$168,656

$28,500

$42,330

$68,945

$84,231

meters

51%

$34,404

$11,850

$11,620

233.5 square

meters

$6,590

$9,260

$2,031

Front

office

14%

Cost pool

$12.2428/

$50.742/

square

meter

hour

rate

cleaning hours

percentage of

Actual usage

Direct usage

Laundry and

23,040 hours

4,360 square

Cost driver

Estimated

Actual

meters

Direct

Direct

Direct

Direct

Area

time

177,106

282,076

3,840

54,977

83,000

156,660

403,213

9,415

221,235

265,281

Total ($)

costs

and insurance

Cleaning and laundry

and beverage

Human resources

Energy, building

Entertainment

Depreciation

depreciation

Cost centers

Marketing

Telephone

Stationary

Personnel

Food

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analysis

615

Table I. Costs allocated to customer groups under traditional ABC (allocation of costs to activity-cost pools)

Banqueting

11 square

50 orders

minutes

$12,500

$15,200

468,241

meters

$7,297

3,487

5,000

19%

preparation

148 orders

10 square

Beverage

minutes

$37,000

$13,600

413,782

meters

$6,634

29,137

20,321

17%

preparation

20 square

72 orders

minutes

$13,268

$18,000

$16,000

381,349

meters

11,800

8,230

Food

20%

Marketing

minutes

124,450

$12,000

2,000

1,395

15%

Housekeeping

352 orders

79 square

minutes

579,208

$52,410

$12,000

$88,103

meters

34,033

23,735

15%

40 orders

minutes

$28,150

$11,200

$10,000

125,105

19,632

Front

office

14%

$250/order

Cost pool

$1.4339/

663.41/

minute

square

meter

rate

Space occupied

76,800 minutes

Maintenance

Cost driver

square

percentage

orders

Estimated

Orders

meters

oftime

time

120

662

80,000

110,120

79,609

165,603

2,092,135

Total ($)

costs

General (administrating and accounting and finance)

Repair and maintenance

Cost centers

Purchasing

Total ($)

Storing

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Table I.

Group 8

150

421,607

413,782

7,825

Group 7

314

314

11,566

548

10

3,090

5,792

2,183

501

Group 6

24

469,444

1,203

468,241

Group 5

16

90,236

16,008

1,570

68,990

802

3,739

10,913

170,941

Group 4

7,268

48,058

2,767

3,767

26,192

40,969

115,219

Group 3

90,414

1,256

300

4,900

5,750

8,730

15,042

32,412

149,568

Group 2

104

5,964

5,214

10,354

84,934

58,364

41,468

189,980

4,603

Group 1

27,724

156,278

15,067

563,780

278,020

1,872

35,619

5,123

93,863

5.63692

18.45225

6.9529

50.140

Total

579,208

31,390

124,450

2,482

67,652

413,782

381,349

17,993

125,105

468,241

Total cost ($) No. of arrivals Cost driver rate ($) Total cost ($) No. of nights Cost driver rate ($) Total cost ($) No. of customer visits Cost driver rate ($) Total cost ($) No. of covers Cost driver rate ($)

($)

cost ($)

Total cost

Total

($) preparation

Food preparation

Housekeeping

Front office

Banqueting

Marketing

Activities

Beverage

Total

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Table II. Costs allocated to customer groups under traditional ABC (allocation of costs of activity-cost pools to customer groups)

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Group 4. These customers are “walk-in” customers coming to the hotel without making reservations. This customer group used accommodation and food and beverage services and had a 12 percent share in the total sales mix.

Group 5. Professional sport clubs coming to the city of Mersin to play football matches constitute this group. Customers in this group stayed in the hotel for one or two days and had a 10 percent share in the total sales mix.

Group 6. This customer group comprises people who organize parties and wedding ceremonies in the hotel. Customers in “group 6” received catering and entertainment services and did not stay overnight in the hotel.

Group 7. These customers come to the hotel to participate in wedding ceremonies and parties and stay in the hotel for just one night. This group had a 1 percent share in the total sales mix.

Group 8. Customers who come to the hotel only for bar and entertainment services are clustered in this group. These customers do not stay overnight in the hotel.

Activities performed in the case hotel In the case hotel, we identified six general activities. Each of these activities comprises several subtasks (sub-activities). These activities and the related subtasks are:

marketing (making calls to customers in order to arrange visits, giving information via e-mail or fax, making customer visits, advertising, and making promotional campaigns), front office (reservation and information, check-in and check-out, meeting and welcoming customers, settling customers in the rooms, opening customers’ accounts, controlling customers’ spending, accompanying customers when they are leaving, and closing customers’ accounts), housekeeping (cleaning the rooms, making beds, vacuuming, and replenishing linens), food preparation and service (taking orders, preparing the kitchen for breakfast, lunch, and dinner, cooking, preparing and serving breakfast, lunch, and dinner, cleaning the kitchen and the restaurant), beverage preparation and service (preparing the bar for beverage service, servicing the beverages, carrying out entertainment activities, and cleaning), and banqueting (making preparations for catering events such as wedding ceremonies, parties, and meetings).

.

.

.

.

.

Allocation of costs to the customer groups under traditional ABC In the case hotel, costs were initially totaled in cost centers along with their dollar value (Table I). These cost centers were: personnel, stationary, telephone, marketing (advertising, promotion, billboard, and customer visit costs), accounting and finance, human resource, administrating, energy (electricity and heating costs), storing (rent, air conditioning, and insurance costs), cleaning and laundry, purchasing, repair and maintenance (material and personnel costs), entertainment, food and beverage (cost of foods and beverage used for restaurant, bar, and catering events), and depreciation. Then, the costs which were directly associated with particular activities were imputed to relevant activity-cost pools. The direct costs that the accountants of the hotel identified were: depreciation costs of equipment, furniture, and fixtures that are used in particular departments, personnel costs, and telephone costs. On the other hand, the costs not directly related to the activities were allocated to the activity-cost pools by means of relevant cost drivers. The activity cost-pools were: front office, housekeeping, marketing, food preparation, beverage preparation, and banqueting.

According to traditional ABC literature (Cooper, 1990; Kaplan and Cooper, 1998), facility-sustaining costs (i.e. accounting, finance, human resource, training, and administrating costs) should be attributed to the activity centers rather than be traced to individual customers. Since facility-sustaining costs cannot be determined as specific costs for particular customers in the case hotel, these costs were first apportioned to the activity-cost pools. Then, from the activity-cost pools they were allocated to the customer groups. This approach is also consistent with the ABC literature. Since it is difficult to determine appropriate cost drivers and relevant consumption rates for the costs of these types, they were apportioned to the activity-cost pools according to some relevant pattern of usage. For allocating the costs of general support activities such as administrating, accounting and finance, and human resource, “the estimated percentage of total personnel time spent for different departments” was used as an allocation base. Information about the time that the personnel, who are engaged in the general support activities, spent for different departments were not documented in the case hotel. Therefore, allocation of these costs was based on staff estimates of the time they spent on each department. For storing the goods, a 120-square meter warehouse was rented next to the hotel building. The costs (rent, air conditioning, and insurance costs) gathered in the “storing” cost center were allocated to the activity-cost pools based on the “amount of floor space occupied in the warehouse”, which was measured in terms of square footage. On the other hand, the costs of the “purchasing” cost center were allocated using the “number of purchase orders” as an allocation base. The costs gathered in the “repair and maintenance” cost center were allocated based on the “actual maintenance time spent”. Information about the “maintenance time” was documented by the accounting department. The stationery and food and beverage costs were allocated according to actual usage of stationary materials and food and beverage goods. The actual usage of these resources was documented and maintained by the accounting department. The laundry and cleaning costs (i.e. costs of personnel, depreciation cost of laundry machine, and cost of cleaning materials) were apportioned among activities according to “number of cleaning hours spent”. As can be seen in Table I, a major part of the cleaning costs were allocated to the “housekeeping” activity because the laundry personnel take the most time to wash and clean the linens of the rooms. On the other hand, depreciation and insurance costs relating to the hotel building were combined with energy costs in the same cost center (because these costs were allocated using the same cost driver) and they were allocated to the activities based on the “amount of floor space” that each department (restaurant, front office, banqueting hall, rooms, bars, and disco) occupies. The entertainment costs were directly imputed to the “beverage preparation” activity. Likewise, the costs (advertising, promotion, personnel, and customer visit costs) which were gathered in the “marketing” cost center were directly assigned to the “marketing” activity (Table I). In allocating the indirect costs to the activities, cost pool rates were used (some numbers in Table I were rounded to the nearest dollars therefore the numbers represent approximate figures). For example, the total amount of “purchasing” costs was divided by 662 orders (which is the total number of orders made during the study period) in order to calculate a cost pool rate of $250 ($165,603/662 orders) per order. Then the rate of $250 was multiplied by the total number of orders made for each activity or department

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in order to allocate the purchasing costs to the activities. For example, the cost pool rate of $250 was multiplied by 72 (total number of orders made for the purchase of the goods to be used in the restaurant) in order to compute $18,000 (Table I). After the costs were allocated to the activity-cost pools, the amounts were summed up and the total amount of costs for each cost pool was calculated. For example, after the amounts in the fifth column in Table I were summed up, the total amount of costs for the front office cost pool was computed as $125,105. Once the total costs of the activity-cost pools were computed, the costs of each activity-cost pool were allocated to the customers via second-stage activity cost drivers which were unique to each activity-cost pool (Table II). The activity cost drivers used by the accounting personnel in order to allocate the cost of front office, housekeeping, marketing, and food preparation activity-cost pools were: the number of arrivals, number of nights spent by customers, number of customer visits, and number of covers, respectively. The costs allocated to the customer groups were calculated using the activity driver rates which were computed by dividing the total amount of costs gathered in each activity-cost pool by the quantity of the relevant activity cost driver. The activity driver rate computed for each activity-cost pool was multiplied by the quantity of related activity cost driver that each customer group consumes. For example, the total cost ($125,105) of the “front office” activity-cost pool was divided by the total number of arrivals (17,993) in order to calculate the activity driver rate of $6.9529 per arrival. Then, the rate of $6.9529 was multiplied by the number of arrivals (quantity of cost driver) related to a particular customer group in order to compute the amount of “front office” costs that should be assigned to that group. For example, the activity driver rate of $6.9529 was multiplied by 5,123 (total number of arrivals made by customers clustered in “group 1”) in order to compute $35,619, which was the amount allocated to the “customer group 1”. The rate per activity driver ($6.9529) was used as a single rate for the “front office” cost pool because it was assumed that each cost driver activity (arrival) consumes the same amount of resources. In fact, this approach is consistent with the traditional ABC literature (Cooper and Kaplan, 1992). One of the customer groups of the case hotel is the “bar customers” who come to the hotel in order to utilize solely the bar services. As a result of the interviews, it was realized that the bar of the case hotel operates to serve the “bar customers” rather than the customers staying in the hotel. It was also realized that customers who stay in the hotel receive food and beverage services in the restaurant rather than in the bar. Therefore, the accountants of the hotel assigned the total cost of the “beverage preparation” activity-cost pool ($413,782) only to the “customer group 8”. Likewise, the total cost of the “banqueting” activity-cost pool ($468,241) was assigned to the “customer group 6” and “customer group 7”.

Allocation of costs under TDABC The calculations made under the conventional ABC system were based on an assumption that the resources of the hotel were utilized at full capacity. Moreover, tracing the costs of activities such as food and beverage preparation, making customer visits, and front office may become a challenging task for the hotel management. This is due to the fact that, the way each customer consumes these activities differs from one another. For instance, some customers take more of the personnel’s time to decide what to eat and drink when they come to the restaurant of the hotel, while some

of them decide quite quickly. Some customers consume all of the available services in the restaurant, whereas some of them do not. Likewise, some of the customers need more advice about the services of the hotel at the front office, while some of them leave the front office quickly. Moreover, when making visits to particular customers, the marketing personnel need to travel and stay longer. Furthermore, the marketing staff members spend more time giving information to some customers before making customer visits. However, some customers do not consume that much effort and resources. Thus, diversity in the use of resources by customers is likely to make it difficult for the hotel management to analyze the costs using a traditional ABC system because ABC uses single cost driver rate for each activity. This is because, the use of a single cost driver does not adequately reflect resource demands associated with the activities performed in the hotel. In that respect, the TDABC, with its time equations, is considered to better reflect the resource demands of the activities in the case hotel. The time unit (in terms of minutes) used for the calculations made under TDABC were average times. These averages were calculated by taking the average of the times we obtained through interviews and observations. The staff members in the case hotel work six days a week and daily working hours vary between seven and 12 hours depending on the department in which the personnel work. For example, the receptionists who are employed at front office work eight hours and 15 minutes a day, whereas the administrative personnel such as the accountant and human resource managers work 12 hours per day. However, the above-mentioned working hours represent theoretical capacity of the personnel, while we based our TDABC calculations on the practical capacity. In implementing the TDABC approach, we did not assign the costs of accounting, finance, human resource, purchasing and administrating departments directly to the customer groups because these costs cannot be determined as specific costs for particular customers in the case hotel. Instead, we considered the ABC cost pools (in which the costs of support activities were already included) as activity costs for making calculations under TDABC. Under the TDABC approach, as it was done under the traditional ABC approach, we assigned the total cost of the “beverage preparation” activity-cost pool ($413,782) only to “customer group 8”. Likewise, the total cost of the “banqueting” activity-cost pool is related solely to “customer group 6” and “customer group 7”. Therefore, we assigned the cost of the “banqueting” activity ($468,241) only to customer groups 6 and 7.

Customer

profitability

analysis

621

Allocation of the costs of front office activities under TDABC The “front office” activity-cost pool consists of direct and indirect costs such as depreciation, personnel, energy, stationery, telephone, repair and maintenance, and purchasing. In addition, it includes the costs which are allocated from human resource, accounting and finance, and administrating cost centers. The costs gathered in the “front office” cost pool were allocated to the customer segments based on the practical capacity of the receptionists. This approach is also consistent with the TDABC literature (Kaplan and Anderson, 2004). Subtasks related to the main “front office” activity are: taking reservations, giving information to a customer, welcoming the customer, settling the customer in the room, opening the customer’s account, monitoring the room in order to control customer’s spending, closing the customer’s account, and accompanying the customer as he\she leaves the hotel. Indeed, the length of time spent on the “front office”

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622

activities varies depending on the type of customer coming to the hotel. For instance, walk-in-customers (group 4) come to the hotel without making reservations, while customers in “group 1”, who come to the hotel more frequently than the others, need four minutes to make a reservation and 2.5 minutes to get information. On the other hand, it takes totally nine minutes for the personnel to make a reservation (six minutes) and give information (three minutes) for a customer in “group 3”. When “bar customers” come to the hotel, they only ask where the bar is. Therefore, it takes only 30 seconds for the personnel to give information to these customers. The total time needed for the main “front office” activity is obtained by summing up the times spent on the related subtasks. For example, for a customer clustered in “group 1”, the reservation activity starts with taking reservations (four minutes) and giving necessary information to the customer (2.5 minutes). After the customer arrives at the hotel, the receptionist welcomes the customer (1.5 minutes), settles the customer in the room (two minutes), and opens the customer’s account (1.5 minutes). At the end of the customer’s stay, the personnel controls the customer’s spending and closes his/her account (four minutes) and accompanies the customer as he/she leaves the hotel (two minutes). In this case, the total length of time, spent at the front office for a customer in “group 1”, is 17.5 minutes. Table III reveals the unit times of consumption of the “front office” activities by each customer group. For instance, for the customers clustered in “group 2”, the receptionists spent 107,352 (5,964 £ 18 minutes) minutes in a year. As Table III shows, the total time actually needed for performing the “front office” activities during the study period was 326,600 minutes. Table III also demonstrates the allocation of the “front office” costs using TDABC. Through the inclusion of the data presented in Table III (“total unit time” column of Table III), we developed the following time equation for estimating the time needed for performing the “front office” activities:

Total time ðminÞ for front office activities

¼ ð17:5 * #customresÞ ½if customer group 1 þ ð18 * #customersÞ ½if customer group 2 þ ð22 * #customersÞ ½if customer group 3 þ ð18 * #customersÞ ½if customer group 4 þ ð12 * #customersÞ ½if customer group 5 þ ð17 * #customersÞ ½if customer group 6 þ ð0:5 * #customersÞ ½if customer group 7 þ 2:5 * #customersÞ ½if customer group 8

The case hotel employs four receptionists to do the front-office work and normal working hours (theoretical capacity) for each person is around eight hours and 15 minutes per day. Each receptionist works six days a week and 26 days in a month. In this case, normal working hours for one receptionist corresponds to 12,870 ½ð8:25 hour £ 60 minutesÞ £ 26 days minutes per month and 154,440 minutes per year. Thus, the theoretical capacity for four receptionists is 617,760 minutes per year. However, each receptionist spends around 75 minutes for breaks, arrival and departure, and resting every day. Therefore, each receptionist actually works only seven hours (which is practical capacity of one receptionist) per day. In this respect, each receptionist practically supplies about 10,920 minutes per month or 131,040 minutes per year. Therefore, the practical capacity of 4 receptionists is about 524,160 minutes per year. Hence, the practical capacity corresponds to around 85 percent (524,160/617,760 minutes) of the theoretical capacity.

Allocated

1,274

16,184

1,146

4,308

21,397

77,950

6,593

25,623

1,425

cost

0.23868

0.23868

0.23868

0.23868

0.23868

0.23868

0.23868

0.23868

($/min)

Rate

minutes

5,338

5,970

4,800

67,806

326,600

27,632

18,049

107,352

89,653

Total

quantity

Activity

314

1,504

5,964

1,256

31,788

3,767

1,920

11,940

5,123

(minute)

Total

2.5

0.5

17.5

107.5

time

unit

18

18

17

12

22

accompanying

(minute) spent

(check-out)

Unit time

customer

on

4 3

16

0

0

2

2

2

3

closing the

controlling

customer’s

Unit time

spending

spent on

(minute)

account

and

4

4 4

0

0

2

2

3

19

customer’s

Unit time

(check-in)

spent on

(minute)

opening

account

1.5

1.5

1.5

1 1.5

8

0

0

1

Unit time

(check-in)

customer

spent on

(minute)

settling

in the

room

2 2.5

2.5

0

0

2

2

12

1

welcoming

Unit Time

(check-in)

customer

spent on

(minute)

1.5

0.5

0

0

10

3 2

2

1

information

Unit time

spent on

(minute)

activity

2.5

0.5

0.5

20.5

4 3

4

3

3

reservation

Unit time

spent on

(minute)

activity

4

4

0 6

0

2

22

5

1

Customer

Group 4 3

Group 6

Group 8

Group 7

Group 2

Group 5

Group 1

groups

Group

Total

Customer

profitability

analysis

623

Table III. Costs of front office activities allocated under TDABC

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624

The cost per minute of capacity supplied is calculated by dividing the cost of capacity supplied by the practical capacity of resources (Kaplan and Anderson, 2004). Thus, we calculated the cost per minute of supplying capacity for the “front office” activities as $0.23868 [$125,105 (Table I)/524,160 minutes]. Then, the rate of $0.2368 per minute was multiplied by the total time (in terms of minutes), needed for each customer group, in order to allocate the costs of the “front office” cost pool to the customer segments. As revealed by the calculations, around 62 percent [326,600 minutes (Table III)/524,160 minutes] of the practical capacity of the resources supplied for the “front office” activities had actually been used for productive work during the study period. Hence, only 62 minutes ($77,950/$125,105) of the total cost of $125,105 was assigned to the customer groups using TDABC. In this case, the total cost of unused resources supplied to perform the “front office” activities was computed as $47,155 ($125,105 2 $77,950).

Allocation of the costs of housekeeping activities under TDABC The “housekeeping” activity-cost pool includes depreciation, personnel, energy, cleaning and laundry, repair and maintenance, storing, and purchasing costs. The “housekeeping” cost pool also comprises the costs allocated from accounting and finance, administrating, and human resource cost centers. The total cost of the “housekeeping” activity-cost pool was allocated to the customer segments based on the practical capacity of the housekeepers. The “housekeeping” activities are classified as activities that take place before a customer comes to the hotel and activities after check-out. These activities constitute several subtasks as follows: cleaning and vacuuming the rooms, making beds, and replenishing linens. The length of time spent on the “housekeeping” activities is almost the same for all customer segments except for the customers clustered in “group 5”. The customers in “group 5” (football players) come to the hotel after training and football matches and they leave their rooms dirtier than the other customers. Therefore, it takes more time and effort for the housekeepers to clean these rooms when compared to the rooms of other customers. The total time for the main “housekeeping” activity is sum of the times spent on the activities performed before check-in and after check-out. For example, before a customer (group 1) checks in, the housekeeper controls (three minutes), as well as cleans and vacuums the reserved room (seven minutes). After the customer settles in, the housekeeper cleans and vacuums the reserved room during customer’s stay (four minutes). After the customer leaves the hotel, the housekeeper cleans and vacuums the room and replenishes the linens (16 minutes). In this case, the total length of time, spent on the “housekeeping” activity for a customer in “group 1”, is 30 minutes. Table IV portrays the average unit times of consumption of resources of the main “housekeeping” activities by each of the customer groups. Table IV also shows the amount of costs allocated under TDABC. Based on the figures presented in Table IV, the total time needed for performing the “housekeeping” activities was calculated as 566,154 minutes. The case hotel employs seven housekeepers and each housekeeper works 6.5 hours per day (excluding time for breaks, meetings, arrival and departure, and resting hours). In this case, each housekeeper supplies about 10,140 minutes per month and 121,680 minutes per year. Thus, the practical capacity of seven housekeepers is 851,760 minutes per year. We combined the “unit time” figures in Table IV (“total unit time”

Allocated

81,970

53,380

5,979

25,622

104,509

113,555

385,015

cost

($/min)

0.68

0.68

0.68

0.68

0.68

0.68

Rate

120,544

566,198

37,680

78,500

153,690

8,792

166,992

minutes

Total

quantity

Activity

314

5,964

17,994

1,256

3,767

1,570

5,123

time

(minute)

Total

28

28

198

30

30

50

32

unit

replenishing linens

after the customer leaves the hotel

(minute)

on cleaning

and

rooms

16

16

16

16

18

113

31

the time

spent

Unit

the

replenishing linens

(minute)

during customer’s

cleaning

rooms and

stay

4

4

4

4

4

4

24

time

Unit on

spent

the

(minute)

on cleaning

(before check-in)

reserved room

vacuuming

44

6

6

7

7

7

11

time

spent

Unit

and

on controlling

(minute)

room

(before check-in)

the reserved

4

17

2

2

3

3

3

time

spent

Unit

Customer

Group 4

Group 7

Group 2

Group 3

Group 5

Group 1

groups

Total

Customer

profitability

analysis

625

Table IV. Costs of housekeeping activities allocated under TDABC

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column) and derived the following time equation for the “housekeeping” activities (customers clustered in groups 6 and 8 are not included in the equation because these customers do not stay overnight in the hotel):

Total time ðmin Þ for housekeeping activities

626

¼ ð30 * #customersÞ ½if customer group 1 þ ð28 * #customersÞ ½if customer group 2 þ ð30 * #customersÞ ½if customer group 3 þ ð32 * #customersÞ ½if customer group 4 þ ð50 * #customersÞ ½if customer group 5 þ ð28 * #customersÞ ½if customer group 7

As previously presented in Table I, the total cost of the “housekeeping” activities was $579,208. Dividing this amount by the practical capacity of 851,760 minutes per year resulted in a cost of $0.68 per minutes as the cost of one time unit of the “housekeeping” activities. The rate of $0.68/minute was then multiplied by the total minutes, spent for each customer group, in order to apportion the costs of the “housekeeping” activities to the customers. The use of TDABC reveals that the cost of unused resources, devoted for the “housekeeping” activities, was $194,193 [$579,208 (again Table I) 2 $385,015]. This is due to the fact that, only 66 percent (which was calculated by dividing 566,198 minutes by the practical capacity of 851,760 minutes) of the practical capacity of the resources supplied for the “housekeeping” activities had been actually utilized during the study period.

Allocation of the costs of food preparation activities under TDABC The “food preparation” activity-cost pool basically consists of depreciation, personnel, energy, stationery, repair and maintenance, purchasing, storing, and food and beverage costs. This cost pool also comprises the costs allocated from the human resource, accounting and finance, and administrating cost centers. We allocated the total cost of the “food preparation” activity-cost pool to the customer segments based on the practical capacity of the personnel working in the restaurant. We identified three common “food preparation” activities (preparing and serving breakfast, preparing and serving lunch, and preparing and serving dinner), with each one comprising several subtasks. These subtasks are: welcoming customers, taking orders, preparing and cooking foods, serving the foods, waiting while the customers eat, and after-service cleaning. In calculating the total time spent on the “food preparation” activities, the unit time a customer spends on eating is also taken into account because the personnel of the restaurant must wait until the customer finishes eating. The unit and total times spent on the subtasks of the “preparing and serving breakfast” activity is presented in Table VI. The total time needed for “preparing and serving breakfast” activity is sum of the times spent on the subtasks. For example, when a customer (group 1) comes to the restaurant, the staff members of the restaurant welcome the customer and take the order (one minute), prepare and serve the food (ten minutes), wait until the customer finishes eating (40 minutes), and deal with after-service cleaning once the customer leaves the restaurant (one minute). In this case, the total length of time, needed to offer breakfast for a customer in “group 1”, is 52 minutes (Table VI in order to see the total unit times needed to serve breakfast for other customer groups). Based on the data presented in Table VI (“total unit time needed for breakfast” column of Table VI), we derived the time equation for “breakfast” as follows (customer

groups 6 and 8 are not included in the equation because these customers do not have breakfast in the hotel):

Total time ðminÞ for breakfast ¼ ð52 * #customersÞ ½if customer group 1

þ ð50 * #customersÞ ½if customer group 2

þ ð52 * #customersÞ ½if customer group 3

þ ð52 * #customersÞ ½if customer group 4

þ ð37 * #customersÞ ½if customer group 5

þ ð38 * #customersÞ ½if customer group 7

Customer

profitability

analysis

627

As can be seen in Table VI, the time spent on performing the “food preparation” activities varies for different customers. For instance, since a set menu is offered to the customers in “group 5”, it takes up less time for the hotel personnel to perform the subtasks for these customers when compared to others. Based on the data presented in Table VI (“total unit time needed for lunch” column in Table VI), we developed the following time equation to capture the estimate of the time necessary to implement the “preparing and serving lunch” activity (Table VI in order to see the total unit times needed to serve lunch to all customer groups):

Total time ðminÞ for lunch ¼ ð95 * #customersÞ ½if customer group 1

þ ð81 * #customersÞ ½if customer group 2

þ ð83 * #customersÞ ½if customer group 3

þ ð94 * #customersÞ ½if customer group 4

þ ð42 * #customersÞ ½if customer group 5

Customer groups 6-8 are not included in the above equation because these customers do not have lunch in the case hotel. Similar to breakfast and lunch, the estimated time for the “preparing and serving dinner” activity can be calculated using the following time equation that we developed based on the data presented in Tables V and VI. In the equation, customer groups 6-8 are not included because these customers do not have dinner in the hotel (“total unit time needed for dinner” column of Table VI):

Total time ðminÞ for dinner ¼ ð145 * #customersÞ ½if customer group 1

þ ð106 * #customersÞ ½if customer group 2

þ ð108 * #customersÞ ½if customer group 3

þ ð129 * #customersÞ ½if customer group 4

þ ð57 * #customersÞ ½if customer group 5

Based on the figures presented in Table V, the total time needed for the “food preparation” activities was calculated as 3,978,510 minutes. On the other hand, the case hotel employs 30 employees in the restaurant and each employee works eight hours per day (excluding meeting and resting hours). In this case, each employee supplies 12,480 minutes per month and 149,760 minutes per year. In that respect, the practical capacity of 30 employees is about 4,492,800 minutes per year. On the other hand, the total amount of indirect costs of the “food preparation activities” amounted to $298,434 [$381,349(Table I) 2 $82,915 (total direct food costs, see Table V)] during the study period. Dividing this amount by the practical capacity of 4,492,800 minutes per year produced $0.07 as the cost of one time unit of the “food preparation” activities. The rate of

18,156

48,346

71,596

361,408

39,810

152,369

31,131

Total

cost

7,654

7,516

30,446

9,013

9,405

82,915

18,881

direct

Total

costs

allocated

10,640

23,477

39,333

278,493

121,923

30,405

52,715

indirect

Total

costs

($/min)

0.07

0.07

0.07

0.07

0.07

0.07

Rate

spent

Total minutes (sum of

minutes lunch,

and dinner)

434,384

561,916

753,056

1,741,786

335,368

152,000

3,978,510

breakfast,

for total

the

VI

spent

(see Table

– column “u)

74,304

59,616

80,878

331,512

419,485

965,795

minutes

dinner

for Total

VI

spent

(see Table

“n”)

3,888

14,608

27,072

224,112

68,685

338,365

minutes

– column

lunch

for Total

spent

– column

(see

261,144

1,253,616

333,008

152,000

477,150

2,674,350

197,432

for breakfast

minutes

VI “g”)

Table

Total

Customer

Group 4

Group 7

Group 2

Group 3

Group 5

Group 1

groups

Total

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628

Table V. Cost of food preparation activities allocated under TDABC (allocation of costs of food preparation activities under TDABC)

(n) {h £ m} total

{o £ t} total

{a £ f} total

minutes needed

minutes needed or lunch

minutes needed

for breakfast

for dinner

261,144

74,304

3,888

333,008

59,616

80,878

14,608

152,000

477,150

1,253,616

331,512

224,112

197,432

27,072

2,674,350

338,365

419,485

965,795

68,685

(u)

(g)

total unit time needed for lunch

total unit time needed

total unit time needed

{b þ c þ d þ e}

{p þ q þ r þ s}

(m) {i þ j þ k þ l}

for breakfast

for dinner

94

38

57

50

37

106

108

42

52

52

52

129

83

95

395

145

545

81

281

(f)

(t)

after service cleaning

after-service cleaning

(l) Unit time (minute)

(minute) needed for

(minute) needed for

needed for after

service cleaning

Unit time

Unit time

6

10

10

2

2

2

2

2

2

3

3

1

1

1

1

1

1

1

1

(e)

(s)

Time spent on serving breakfast

Time spent on serving dinner

Time spent on serving lunch

during having lunch

(minute) spent

(minute) spent

(minute) spent

during having

during having

Unit time

Unit time

Unit time

breakfast

dinner

40

60

60

40

50

50

30

90

40

30

30

40

40

40

210

220

330

75

45

(d)

(k)

(r)

Unit time (minute)

the order and serving

the order and serving

the order and serving

Unit time (minute)

Unit time (minute)

needed for preparing

needed for preparing

needed for preparing

breakfast

dinner

lunch

34

44

34

34

6

8

8

8

10

10

10

39

39

49

5

125

175

35

45

(q)

(c)

(j)

Unit time (minute)

Unit time (minute)

needed for welcoming

needed for welcoming

needed for welcoming

customers and taking orders for dinner

customers and taking

customers and taking

Unit time (minute)

orders for breakfast

orders for lunch

6

8

30

8

30

7

7

7

7

3

3

5

5

1

1

1

1

1

1

(p)

(b)

(i)

customers having

customers having

customers having

Quantity

Quantity

Quantity

(number of

(number of

(number of

breakfast)

dinner)

6,404

576

176

288

48

24,108

5,816

5,336

5,336

10,120

552

54,412

4,000

5,022

763

723

2,893

9,543

6,571

lunch)

(h)

(a)

(o)

Customer

Customer

Customer

Group 4

Group 4

Group 4

Group 7

Group 7

Group 7

Group 2

Group 2

Group 2

Group 3

Group 3

Group 3

Group 5

Group 5

Group 5

Group 1

Group 1

Group 1

groups

groups

groups

Total

Total

Total

Customer

profitability

analysis

629

Table VI.

Cost of food preparation activities allocated under TDABC (time spent on subtasks of the main food preparation activities)

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630

$0.07/minute was then multiplied by the total minutes, spent for each customer group, in order to allocate the costs of the “food preparation” activities to the customers. As can be found in Table V, the total amount of the “food preparation” costs, which were assigned to all of the customer groups, was $361,408 (including the direct food costs). This means that, only around 94 percent ($361,408/$381,349) of the total cost of $381,349 was assigned to the customers using TDABC. In this case, the total cost of unused resources, supplied for performing the “food preparation” activities, was computed as $19,941 ($381,349 2 361,408). This is due to the fact that, only 3,978,510 minutes (Table V) of the practical capacity of 4,492,800 minutes had actually been used for productive work during the study period.

Allocation of the costs of marketing activities under TDABC The “marketing” activity-cost pool consists of depreciation, personnel, repair and maintenance, advertising, promotion, customer visit, telephone, fax, e-mail, accounting and finance, human resource, and administrating costs. Advertising costs include costs of radio and television advertising, as well as the cost of billboards displayed in several places throughout the city of Mersin. On the other hand, promotion costs include the cost of gifts (pens, watches, and calendars) presented to the customers. Each gift set costs around $7.6 per customer. These gifts, however, are not given to all of the customers staying in the hotel. Since advertising and promotion costs are directly related to particular customers, we directly assigned these costs to the relevant customer segments. On the other hand, we allocated indirect marketing costs to the customer segments based on the practical capacity of the marketing personnel. The case hotel employs two marketing personnel to make customer visits and related phone calls. Each person works seven hours per day and six days per week (excluding meeting, vacation, and resting hours). Thus, each person supplies 10,920 minutes per month and 131,040 minutes per year. In this case, the practical capacity of two employees is 262,080 minutes per year. The total cost of “customer visits” and relevant “fax, telephone, and e-mail” costs amounted to $60,112 ½cost of customer visits ð$50; 269Þ þ cost of fax; telephone; and e–mailð$9; 843Þ during the study period. Dividing this amount by the practical capacity of 262,080 minutes per year resulted in a cost of $0.23 per minute as the cost of one time unit. Then, the rate of $0.23/minute was multiplied by the total minutes, that the marketing personnel spent visiting each customer group, in order to apportion the costs of the “marketing” activities to the customer segments. Table VII demonstrates the allocation of the costs of “customer visits” under TDABC. The time spent to make customer visits and perform related subtasks changes depending on the type of the customer. For example, before making a visit to a customer in group 1, the marketing staff members phone the customer in order to arrange an appointment (two minutes). After the appointment is arranged, the staff members give information about the hotel to the customer via e-mail or fax (two minutes). Then, the customer is visited (30 minutes). In this case, the total time needed for making a visit to a customer in “group 1” is 34 minutes. On the other hand, it is 52 minutes for a customer in “group 2”. Based on the figures presented in the “total unit time” column of Table VII, we derived a time equation to estimate the total time needed for making customer visits and performing related subtasks (customers in group 4 are not included in the equation because they are walk-in customers):

2,404

4,750

82,700

26,732

1,093

5,383

39,663

2,675

Total

cost

Promotion

(direct)

4,338

500

3,200

92

369

115

costs

31

31

Advertising

(direct)

10,614

1,062

38,769

59,999

2,123

2,123

2,123

3,185

costs

allocated to

customers

customer

Cost of

166

1,196

12,918

0

460

2,760

863

18,363

visits

($/min.)

Rate

0.23

0.23

0.23

0.23

0.23

0.23

0.23

minutes

56,168

79,838

0

720

5,200

3,750

2,000

12,000

Total

number of

quantity)

(activity

Total

visits

16

2,198

0

40

240

100

150

1,652

(minute)

Total

time

unit

34

0

50

50

52

256

45

25

Unit time

customer

spent on

(minute)

visiting

224

0

40

30

43

45

45

21

spent

to

on giving

Unit time

customer

information

0

2

2

2

3

3

3

15

(minute)

spent

arranging

appointment

Unit time

4

4

0

17

2

2

2

3

(minute)

on

Customer

Group 4

Group 6 5

Group 8

Group 2

Group 3

Group 1

groups

Group

and 7

Total

Customer

profitability

analysis

631

Table VII. Cost of marketing activities allocated under TDABC

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Total time ðminÞ needed for making customer visits

¼ ð34 * #customersÞ ½if customer group 1 þ ð52 * #customersÞ ½if customer group 2 þ ð50 * #customersÞ ½if customer group 3 þ ð45 * #customersÞ ½if customer group 5 þ ð50 * #customersÞ ½if customer groups 6 & 7 þ ð25 * #customersÞ ½if customer group 8

Table VII summarizes the dollar amount of the costs of advertising, promotion, and customer visits which were assigned to each customer group using TDABC. Since 79,838 minutes of the practical capacity of 262,080 minutes had actually been used for making customer visits, around 30 percent (79,838 of 262,080 minutes) of the “marketing” resources had been used for productive work during the study period. In this case, the total cost of unused resources devoted for the “marketing” activities was computed as $41,750 ($124,450 2 $82,700).

3. Interpretation of the results In this case study, we have developed a TDABC model for the case hotel in order to implement CPA. Table VIII compares the profitability figures computed by means of the traditional and TDABC systems. The figures in the “total cost” column in the “traditional ABC” section of Table VIII are taken directly from the “total” column of Table II. The figures calculated for customer groups 1, 2, 3, 4, and 5 in the “total cost” column in the “TDABC” section of Table VIII are obtained by summing up the figures in the “total cost” columns in Tables III-VII. The “total cost” figure for “customer group 6” and “customer group 7” is obtained by adding up the relevant figures in the “total cost” columns in Tables III-VII and the total cost of “banqueting” activity-cost pool ($468,241). On the other hand, the “total cost” figure for “customer group 8” is found by adding up the relevant figures in the “total cost” columns in Tables III and VII to the total cost of “beverage preparation” activity-cost pool ($413,782). In Table VIII, the revenue figures for customer groups 1, 2, 3, 4, and 5 are obtained by summing up the restaurant and accommodation revenues. For example, the total amount of revenue ($948,385) generated from “customer group 1” is obtained by summing up accommodation ($807,602) and restaurant revenues ($140,783). The total amount of the restaurant revenue ($140,783) is calculated by totaling breakfast, lunch, and dinner revenues. Since the “banqueting” activities are organized for only “customer group 6”

 

Customer

 

Traditional ABC Relative

 

TDABC

Relative

groups

Revenue

Costs

Profit

profitability

Costs

Profit

profitability

Group 1

948,385

563,780

384,605

0.32

305,007

643,378

0.42

Group 2

216,433

189,980

26,453

0.03

192,274

24,159

0.02

Group

3

146,887

149,598

2 2,711

2 0.02

68,729

78,158

0.05

Group 4

315,117

115,219

199,898

0.15

139,057

176,060

0.12

Table VIII. Comparison of profitability figures calculated under traditional and TDABC

Group

5

160,087

170,941

2 10,854

2 0.01

131,688

28,399

0.02

Group 6

 

and 7

942,892

481,010

461,882

0.40

497,750

445,142

0.29

Group 8

576,000

421,607

154,393

0.13

454,591

121,409

0.07

Total

3,305,801

2,092,135

1,213,666

1.00

1,789,096

1,516,705

1.00

and “customer group 7”, the total amount of the banqueting revenues ($942,892) is related solely to these customer groups. The amount of the bar revenues generated from “customer group 8”, on the other hand, amounts to $576,000. As Table VIII reveals, “customer group 3” and “customer group 5” who are determined unprofitable customer segments using a traditional ABC method are found profitable using a TDABC method. For example, the use of a traditional ABC method demonstrates that “customer group 5” (sports clubs) shows $10,854 of loss. On the other hand, the calculations made with the TDABC method reveal that “customer group 5” generates $28,399 of net profit. Moreover, in Table VIII we can observe that, profitability figures computed using a TDABC approach are higher for all the customer groups when they are compared to the ones calculated using a traditional ABC system. This case study also highlights the difference between the capacity supplied and the capacity used in the case hotel. In this case study, we found that $303,039 ($2,092,1352 $1,789,096) cost of unused capacity exists in the case hotel. Of the total dollar amount of the cost of unused capacity, $41,750 represents the cost of unused resources kept for the “marketing” activities. Likewise, the cost of unused resources, which are related to the activities in the restaurant, is $19,941. On the other hand, $194,193 and $47,155 represent the costs of unused resources devoted for the “housekeeping” and “front office” activities, respectively. The TDABC analysis in the case hotel reveals that only 66 percent of the resources supplied for the “housekeeping” activities (566,198 of 851,760 minutes), 62 percent of the resources supplied for the “front office” activities (326,600 of 524,160 minutes), 89 percent (3,978,510 of 4,492,800 minutes) of the resources supplied for the “food preparation” activities, and 30 percent (79,838 of 262,080 minutes) of the resources supplied for the “marketing” activities had been actually utilized during the period of the study.

Customer

profitability

analysis

633

4. Conclusions and managerial implications What does this all mean for the hospitality industry? First, there is support for the TDABC model which incorporates activities, cost of resources supplied for the activities, practical capacity of the resources devoted for performing the activities, and the unit times spent on these activities. In that respect, the study produced valuable information which will support various managerial decision makings. First, these findings will allow the managers of the hotel to tailor the cost system strategies more effectively. Each of the activities and unit times are adaptable for a TDABC model, allowing the managers of the hotel to determine where they need to improve their productivity and see how these improvements will affect the external value and overall profitability of the organization. It seems that ABC is a necessary, efficient, but not sufficient measurement tool for profitability analysis. More importantly, it ignores the importance of the cost of unused resources assigned to different customer segments. Moreover, the managers of the hotel should remember that tracing the cost of some activities to customers using a traditional ABC approach may not be feasible due to the diversity in the use of resources by various customers. If the managers of the hotel want to install and implement a TDABC method for CPA in the subsequent periods in order to overcome the limitations of a traditional ABC system, all they need is obtain estimates for the costs of the activities that are performed in the hotel, as well as average times needed to perform these activities. The estimates of the times, which are needed for performing the activities, can be obtained via the time equations we

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developed in this case study. In that respect, based on the practical capacity of the resources supplied, the costs of the activities, and the time estimates for the activities, the hotel management will be able to execute CPA via a TDABC model. In implementing a TDABC model, the cost of activities should be divided by the practical capacity of the resources, which is expressed as the amount of time that employees (i.e. receptionists and housekeepers) can work, in order to compute the cost per time unit for each activity. Costs then can be assigned to customers by multiplying the cost per time unit by the time needed to perform the activity for each customer. The time equations will also provide the management with a chance to update the TDABC system quickly without any need for repetitive interviews. In this regard, not only will the use of a TDABC system provide the managers with an insight into more accurate CPA information, it will also make the unused capacity visible. Second, there is a clear evidence indicating that the front office, housekeeping, food preparation, and marketing departments have idle capacity. It is a well-known fact that the hospitality industry is labor intensive and that personnel have a major impact on the profitability of the hotel. In this case, the managers of the hotel should concentrate on uncovering appropriate strategies for maximizing capacity utilization. For instance, one starategy they can utilize might be to provide the personnel with necessary training and motivation to follow and answer the needs and expectations of the customers in order to attract more customers and to eliminate the idle capacities in the future. Depending on the expected chages in the customer mix in the subsequent periods, the use of a TDABC system with its time equations will provide managers with an opportunity to estimate the capacity requirements of different departments. Thus, the time equations of TDABC will assist the managers in understanding whether it will be necessary to switch the personnel from one department to the next, in order to balance capacities among departments. Obviously, with a TDABC approach, the managers of the hotel will be better equipped to understand whether capacity is enough to face forthcoming demands. This will allow better manpower planning, which will in turn foster effective utilization of human resources. With better manpower planning, the managers will be in a better position to recruit the right type of employees who can be a good match with the needs of the hotel, as well as they will be able to estimate training needs of the personnel more effectively. This will in turn enable appropriate training programs to be implemented accordingly. Arranging appropriate training programs will assure that the training budget is used efficiently. At the same time, better manpower planning may also allow the hotel management to be in a better position to provide long-term contracts to the employees, hence reduce personnel turnover. This in turn can lead to increased job satisfaction and organizational commitment among employees. Furthermore, the use of time equations will provide the hotel management with an opportunity to see the time demands of the activities. This will aid the managers in identfying which activities consume much time, taking necessary actions in order to reduce the amount of time required by these activities, and ultimately reducing the costs of serving customers. Third, the managers, using customer profitability information gained through TDABC, will be in a better position to determine which strategy (such as focus, differentiation, and cost leadership) is useful for maximizing the overall profitability of the hotel. With the help of the results of this case study analysis, the managers of the hotel can now better distinguish profitable customers from unprofitable ones. Obviously, this will

result in better-informed managerial decisions. In that respect, the hotel management should tailor appropriate programs for managing customer relationships. For instance, the managers of the hotel should implement different promotional programs or campaigns in order to attract more profitable customers during different seasons. The hotel can attract low-profit customer groups during low seasons and may provide services to high income groups at peak times. Additionally, by using a customer relationship marketing system, the hotel personnel can keep track of customers’ demands and what action has been taken on these demands by other hotels. The calculations made under the conventional ABC system reveal that some customer groups (customer groups 3 and 5) are unprofitable. This is due to the fact that, these customers are burdened with the cost of unused capacity. In this case, based on the ABC analysis, the managers of the hotel may be tempted to consider raising prices or cutting costs by changing service concepts in order to turn unprofitable customers into profitable ones. However, raising prices and changing service concepts, which may in turn result in changes in the customers’ quality perceptions of the hotel, and possibly lead to a loss of customers to competitors. On the other hand, contrary to the traditional ABC, the TDABC cost analysis shows that prices set for these customer groups truly cover the costs of serving them, despite the fact that these customers are low-profit contributors. Based on this finding, the managers of the hotel should be alerted to revisit the managerial strategies concerning these customers and tailor new strategies accordingly. According to TDABC CPA outcomes, customer groups 1, 6, and 7 are high profit contributors for the case hotel. Thus, the hotel management should develop necessary marketing strategies in order to increase guest loyalty from these customer groups. This will subsequently enable the hotel to subsidize low profit contributors (i.e. customer groups 2, 3, and 5) with profits generated from the high-profit contributors. Additionally, having obtained the results of the TDABC analysis, the hotel management will better determine the customer mix which will generate the highest returns in the future. The findings of this study have been generated from a case study in a single four-star hotel in Turkey. Although the results of this study cannot be generalized to the hotel industry as a whole, it may shed light to the insights of cost practices in hotels from a TDABC model perspective. For further research, this study can be replicated in other hotels both in Turkey and abroad and also at different star-ratings to see if the results would be generalizable. It would be very interesting for managers of other hotels to identify profitable and unprofitable customers and their own idle capacity using a TDABC approach. Furthermore, the TDABC method should be tested in other organizations (i.e. restaurants) in the hospitality industry in order to provide a better understanding of the application of TDABC in the tourism sector.

Customer

profitability

analysis

635

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Further reading Cooper, R. and Kaplan, R. (1988), “Measure costs right: make the right decisions”, Harvard Business Review, September-October, pp. 96-103.

Corresponding author Ilhan Dalci can be contacted at: ilhan.dalci@emu.edu.tr

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