Activity-Based Costing

Happy Days provides tours to locations all over South America. Some of its most popular destinations include Macchu Picchu, the Galapagos Islands, Patagonia and Easter Island. The firm caters to groups of five or more and takes care of all arrangements from start to finish. Happy Days arranges for flights to the location, books accommodations, arranges for meals that meet the group's interests and specifications, and provides sightseeing with a local guide. Due to its policy of maintaining strong personal contact with all clients, the firm requires that there can be no more than 8 people per guide.

The firm uses an ABC system to determine the cost of each tour. Flights to the locations (since they can originate all over the world) are treated as direct costs. All other costs are indirect, since they are the result of extensive contracts that determine costs for all tours. There are three cost pools. Accommodations, which include the hotel rooms, all transfers between the hotels and airports and any relates tips or port charges. The cost driver is number of couple/days (number of couples times number of days). If any person in the group will not share a room, that person is counted as a couple. The food cost pool includes all food for the entire tour, including tips, transportation, carefully chosen beverages and meal-time entertainment. The cost driver is person/days (number of people times number of days). The sightseeing cost pool includes all transportation to the activities chosen by the group, any admission fees, the cost of the guides and carefully chosen souvenirs that are intended to remind the group of their vacation. The cost driver is guide/days (number of guides for group times number of days of tour).

For the upcoming summer season, the following estimates have been made:

Number of tours75

Average duration of tour5 days

Average number in group10 people

Average rooms per group6 rooms

Cost of flights$450,000

Food cost592,000

Accommodations389,000

Sight-Seeing365,000

The Jones family (there are 19 of them) has booked a tour to Machu Picchu. They will fly into Cuzco from Vancouver, San Francisco and Halifax to meet their guides. The cost of their flights will total $6,230. They will then travel to Aguas Calientes where they will stay for 8 days. During that time, they will visit Machu Picchu 5 times and take two day hikes along the Inca trail complete with llama pack animals and wine and cheese picnics. Five people in the party do not wish to share rooms.

1. Flights are treated as a direct cost and hotels rooms are indirect. Is there an essential difference between the two costs that justified this treatment? Would you recommend a change? If so, what specific change? If not, why not? Remember to keep your comments specific to the firm in the problem.