HOTEL GROUP COSTING EXERCISE The apportionment of costs to separate operational units within an organisation is often criticised for its apparently arbitrary nature and because the cost may not be controllable by the operational unit manager.

REQUIREMENT: Explain 1.

The arguments for apportioning central costs to the divisions in a decentralised organisation.

2. The criteria which you would use in assessing the suitability of a system of cost apportionment.

A small hotel group, comprising five hotels, has installed a central reservation system with the long-term strategic aim of increasing profitability by improving marketing and management information. In the first year of operation, the annual costs incurred in respect of the central reservation systems were (Amounts 000): Fixed (leasing equipment, computer costs) 4 300, Fixed (marketing) 2 500, Fixed (enquiry staff) 1 800, Fixed (Head Office) 100, Total R8 700. It is considered that these costs should be apportioned to each hotel. The new system has not saved significant costs at each hotel, but has provided better management information locally, and for central marketing. Additional sales of accommodation (room nights) have been achieved by central marketing, using the information now available. The Finance Director has proposed apportioning all the costs of the central reservation system on the same basis, that of the total room revenue for each hotel. The hotel managers' total remuneration includes a significant bonus element related to their hotel's profit performance. The managers of hotels A and D have protested strongly about this proposal, which they consider could have an adverse effect upon their total remuneration. Summary date for the hotels for the first year of operation of the central reservation system table has been attached.

REQUIREMENTS:

1. Explain, with supporting calculations, why the managers of hotels A and D dislike the Finance Director's proposal to apportion the costs of the central reservation system on the basis of total room revenues for each hotel. Evaluate whether they are justified in claiming that it could have an adverse effect on their remuneration.

2. The managers of hotels A and D have expressed the view that they would prefer a system under which the costs of the central reservation system are apportioned on the basis of room nights sold by central marketing, a flat rate charge per room night sold. Explain and discuss the arguments, other than the financial advantage to the managers of hotels A and D, that could be advanced to justify this approach.

3. As a consultant to the Group Management Accountant recommend with reasons, using the data available how the costs of the central reservation system should be related to individual hotel operations. Compare the results per hotel with the Finance Director's system, and with the system described in (2) above preferred by the managers of hotels A and D.