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. (Refer to image for details)

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 (Please refer to image for table data)

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. (Please refer to image for details)

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: (000) Fixed (leasing equipment, computer costs) 4 300 Fixed (marketing) 2 500 Fixed (enquiry staff) 1 800 Fixed (Head Office) 100 Total R3 700 Summary date for the hotels for the first year of operation of the central reservation system: Hotel C Hotel D Hotel E N um ber of 96 88 70 Rooms Room revenue for R68, 330 R20,500 R22,640 R30,030 R8,640 R150,140 Year (000) % occupancy* 80 60 68 85 52 71 system enquiries Rooms nights sold 4,900 6,200 7,300 1,700 5,500 25,600 by central marketing *This is the room nights sold compared with the total number of room nights available per year