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Activity-Based Costing in the Hospitality Industry:

A Case Study in a Hotel Bita Mashayekhi, Mohammad Ara A World Academy of Science, Engineering and Technology International Journal of Social and Business Sciences Vol:11, No:9, 2017 International Scholarly and Scientific Research & Innovation 11(9) 2017 2254 ISNI:0000000091950263 Open Science Index, Social and Business Sciences Vol:11, No:9, 2017 waset.org/Publication/10007835 According to [10], service companies are ideal candidates for ABC even more than manufacturing companies. Their explanation for this statement is that most of the costs in services organizations are fixed and direct, while manufacturing companies can trace important components (such as direct materials and direct labor) of cost to individual products. So, indirect costs are likely to be a much smaller proportion of total costs. Service companies also supply most of their resources in advance, and fluctuations in the usage of activity resources by individual services and customers do not influence short-term spending to supply the resources. These costs are treated by traditional costing systems as fixed; therefore, they are irrelevant for most decisions. Some researchers showed the possible use of traditional costing systems (job-order costing and process costing) in the hospitality services industry [9]. One study proposes that ABC is the most effective and accurate costing method for customer profitability analysis in hotels. This study supports using ABC as a basis that identifies the type of task rather than the productfor instance, sales activities rather than sales salaries, telephone costs, and so on. It also suggests that overhead costs should be identified and then allocated to the respective market segment [11]. According to [11] there are four steps for designing an ABC system in hotels. These steps are: (1) identifying activities, (2) assigning costs to cost pools, (3) selecting appropriate cost drivers for assessing the cost of activities to cost objects, and (4) assigning the cost of the activities to services and to customers. They present the cost drivers and cost pools that could be used by hotels that want to apply the ABC system. Reference [12], however, highlights that the use of ABC in the hotel industry is limited, as no hotels in Europe have adopted this approach. The results of this study showed a significant theoretical knowledge of ABC among research participants; however, there was a low understanding about its application in hotels [7]. III. THE CASE STUDY AND RESEARCH DESIGN In this research, we use ABC for costing purposes; that is, for calculating service cost per unit in the hospitality industry in Iran. To do this, we selected a decent Iranian international hotel- Tabriz International hotel- and use its accounting data in 2012 for costing purpose via ABC and traditional systems. One of the co-authors of this study is the executive manager of the hotel, and therefore, has direct access to all needed information. The case hotel is currently using a traditional system to conduct its costing. The physical and environmental information about the hotel is as follows: it is a four-star hotel operating in Tabriz in Iran, located in one of the best areas in the center of the city, and is privately owned. It has 132 rooms including single, double and triple rooms. Tabriz International Hotel was built in 1971 and fully renovated in 2005. In addition to a banqueting hall, coffee shop, meeting room, and business center facilities, various other services which are suitable for four-star hotel standards are also offered at the hotel. Tabriz International hotel employs 75 personnel (Table I). The data presented in this case study represent real figures gathered throughout the one-year period, 2012. All the data presented in this study are expressed in US$. TABLE I HOTEL STAFF INFORMATION IN 2012 Department Numbers Management 3 Administrative and Accounting 5 Supplies and storage 2 Front desk 9 Security guard 5 Restaurant 20 Technical and engineering 5 Coffee shop 5 Conference (meeting) room 3 Housekeeping 18 Total 75 IV. RESULTS For costing in hotels as with other enterprises, it is necessary to understand the cost structure. The cost structure at Tabriz International Hotel has been presented in Table II. TABLE II COST STRUCTURE AT TABRIZ INTERNATIONAL HOTEL 1- Direct material 2- Direct labor 3- Overhead and Administrative cost: a) Property Operations and Maintenance b) Transportation c) Utility d) Property insurance e) Depreciation and Amortization f) Other Tabriz International Hotel uses the traditional system for costing. In this system, floor space occupied is the overhead allocation base. Therefore, the predetermined overhead allocation rate equals the overhead cost divided by floor space occupied. Table III presents the predetermined overhead allocation rate for the years 2011 and 2012. TABLE III PREDETERMINED OVERHEAD ALLOCATION RATE AT TABRIZ INTERNATIONAL HOTEL Predetermined overhead allocation rate (Dollars per m2 ) Floor space occupied (m2 ) Overhead cost (Dollars) Year 2011 188,856 7,300 25.870 2012 234,731 7.300 32.155 TABLE IV RECOGNIZED SERVICE CENTERS AT TABRIZ INTERNATIONAL HOTEL Service center 1 House keeping 2 Restaurant 3 Coffee shop 4 Conference room 5 Souvenir shop For costing purposes, four different service centers have been recognized at Tabriz International Hotel, which have World Academy of Science, Engineering and Technology International Journal of Social and Business Sciences Vol:11, No:9, 2017 International Scholarly and Scientific Research & Innovation 11(9) 2017 2255 ISNI:0000000091950263 Open Science Index, Social and Business Sciences Vol:11, No:9, 2017 waset.org/Publication/10007835 been presented in Table IV. Table V shows the allocated overhead to different service centers at Tabriz International Hotel in 2012. In Table VI, total cost allocated to all service centers under traditional costing has been shown separately. In the next stage, we calculate cost per service unit for each service center. Table VII shows the cost of each service center per its activity unit. For example, the activity unit for housekeeping and restaurant are the number of rooms and number of guests, respectively. As the souvenir store function has been outsourced, its activity unit is number of renting, similar to the conference room. TABLE V OVERHEAD COST ALLOCATION IN 2012 Allocated Overhead (Dollars) Predetermined overhead allocation rate (Dollars per m2 ) Floor space occupied (m2 ) Service centers 183,283 32.155 House keeping 5700 Restaurant 500 16,078 Coffee shop 200 6,431 700 22,508 Conference room Souvenir shop 200 6,431 total 7,300 234,731 TABLE VI COST ALLOCATION TO SERVICE CENTERS USING TRADITIONAL COSTING IN 2012 (IN 000 DOLLARS) Cost Item House keeping Restaurant Coffee shop Conference room Souvenir shop total Direct Material 33 66 24 3 0.5 126.5 Direct Labor 44.5 63 29 6 0.5 143 Overhead and Administrative cost 183 16 6 22 6 233 Total 260.5 145 59 31 7 502.6 TABLE VII COST PER SERVICE UNIT USING TRADITIONAL COSTING IN 2012 (IN DOLLARS) Service centers Activity unit (Allocation base) Total costs Number of activity unit Cost per each activity unit House keeping No. of rooms 263,162 32,028 8.22 Restaurant No. of guests 145,000 116,000 1.25 Coffee shop No. of guests 59,162 85,880 0.69 Conference room No. of renting 31,000 349 88.83 Souvenir shop No. of renting 5,595 10 560 If we suppose that each guest stays one night at the hotel and uses the restaurant and coffee shop only one time, the cost of one guest in 2012 has been calculated and presented in Table VIII. TABLE VIII COST PER GUEST USING TRADITIONAL COSTING IN 2012 (IN DOLLARS) Service centers Cost per each activity unit House keeping 8.22 Restaurant 1.25 Coffee shop 0.69 Total 10.16 In the next stage, we do costing for Tabriz International Hotel using ABC system. In applying the ABC method for costing in Tabriz International Hotel, we have to recognize the main activities and then identify the allocation base for each activity. For this reason, we review the main processes in this hotel and try to distinguish between operational and nonoperational activities for further analysis. According to our study, there are five main cost centers in Tabriz International Hotel as follow: (1) Housekeeping, (2) Restaurant, (3) Administrative and Accounting, (4) Technical and engineering, and (5) Marketing. Among these cost centers, housekeeping and restaurant are operational; and administrative and accounting, technical and engineering, and marketing are non-operational costs. The operational costs are directly related to services provided for guests, and nonoperational costs cannot be directly traced to those services. There are five different types of costs which occur regarding to all activities, as follows: 1. Payroll costs 2. Raw material costs 3. Employee benefit costs 4. Utility costs 5. Repair and maintenance costs 6. Other costs Table IX shows relevant data about cost centers, main activities, and allocation bases which we need to know for applying the ABC system. Now we allocate non-operational costs, including administrative and accounting, technical and engineering, and marketing costs to the operational cost centers (housekeeping and restaurant) based on floor space occupied by these activities. Overhead allocation rates for each non-operating cost in 2012 have been presented in Table X. In this stage, we can sum up the allocated costs from nonoperating activities to housekeeping and restaurants and their own costs. Tables XII and XIII show these calculations for housekeeping and restaurant, respectively. Now it is time to calculate cost per service unit for each main activity center. The service unit for housekeeping and restaurant are the number of rooms sold and the number of served meals during the year, respectively. Table XIII shows the cost per one sold room. In Table VIII, we suppose guests who occupy 32,028 rooms, have used the restaurant service (including coffee shop) 201,880 times. In Table XIV, we compare cost per unit under the traditional costing and ABC systems. As is shown in Table XIV, cost per unit in different costing systems is not same. In this case, ABC shows housekeeping activity more cost consuming than the restaurant. Therefore, if the prices are determined based on actual costs (i.e., cost- plus pricing), the prices for restaurant are not fair and the restaurant can lose customers to probably less expensive competitors. On the other hand, the cost-plus prices in this situation for rooms (housekeeping) is not high enough to cover all of relevant World Academy of Science, Engineering and Technology International Journal of Social and Business Sciences Vol:11, No:9, 2017 International Scholarly and Scientific Research & Innovation 11(9) 2017 2256 ISNI:0000000091950263 Open Science Index, Social and Business Sciences Vol:11, No:9, 2017 waset.org/Publication/10007835 costs. In this condition, the case hotel in this study may encounter more problems related to profitability in the future. TABLE IX RELEVANT DATA FOR APPLYING ABS Cost Center Floor Space Occupied No. of Employees Cost Type Amount (Dollars) Housekeeping 5900 35 Payroll 63,520 Raw material 35,828 Employee benefit 26,447 Utility 49,427 Repair and maintenance 44,126 Other costs 33,881 Total 253,230 Restaurant 1400 25 Payroll 49,625 Raw material 65,753 Employee benefit 18,283 Utility 53,69 Repair and maintenance 6,875 Other costs 5,988 Total 151,893 Administrative and Accounting 1050 8 Payroll 15,880 Raw material 4,471 Employee benefit 6,729 Utility 8,237 Repair and maintenance 6,132 Other costs 6,289 Total 47,737 Technical and Engineering 400 5 Payroll 9,925 Raw material 12,881 Employee benefit 4,075 Utility 1,799 Repair and maintenance 3,396 Other costs 1,162 Total 33,239 Marketing 250 2 Payroll 3,970 Raw material 7,342 Employee benefit 1,899 Utility 558 Repair and maintenance 1,366 Other costs 2,698 Total 17,833 TABLE X ALLOCATION OF NON-OPERATING COSTS TO OPERATING COST CENTERS (IN DOLLARS) Cost Type Payroll Raw material Employee benefit Utility Repair and maintenance Other Non-operating costs A&A 15,880 4,471 6,729 8,237 6,132 6,289 T&E 9,925 12,881 4,075 1,799 3,396 1,162 M 3,970 7,342 1,899 558 1,366 2,698 Floor space occupied H 5,900 5,900 5,900 5,900 5,900 5,900 R 1,400 1,400 1,400 1,400 1,400 1,400 Sum 7,300 7,300 7,300 7,300 7,300 7,300 Allocation rate A&A 2.18 0.61 0.92 1.13 0.84 0.86 T&E 1.36 1.76 0.56 0.25 0.47 0.16 M 0.54 1.01 0.26 0.08 0.19 0.37 Allocated cost to H A&A 12,835 3,614 5,439 6,657 4,956 5,083 T&E 8,022 10,411 3,293 1,454 2,745 939 M 3,209 5,934 1,535 451 1,104 2,181 Allocated cost to R A&A 3,045 857 1,290 1,580 1,176 1,206 T&E 1,903 2,470 782 345 651 223 M 761 1,408 364 107 262 517 Note: In this table A&A is for administrative and accounting, T&E for technical and engineering, M for marketing, H for housekeeping, and R for restaurant. World Academy of Science, Engineering and Technology International Journal of Social and Business Sciences Vol:11, No:9, 2017 International Scholarly and Scientific Research & Innovation 11(9) 2017 2257 ISNI:0000000091950263 Open Science Index, Social and Business Sciences Vol:11, No:9, 2017 waset.org/Publication/10007835 TABLE XI HOUSEKEEPING ACTIVITY TOTAL COSTS IN 2012 (IN DOLLARS) Cost Type Payroll costs Raw material costs Employee benefit costs Utility costs Repair and maintenance costs Other costs Direct Costs 87,585 55,309 36,714 57,989 52,931 42,083 Allocated costs from: A&A 12,835 3,614 5,439 6,657 4,956 5,083 T&E 8,022 10,411 3,293 1,454 2,745 939 M 3,209 5,934 1,535 451 1,104 2,181 Total activity cost 108,442 69,334 45,446 66,100 60,632 48,105 TABLE XII RESTAURANT ACTIVITY TOTAL COSTS IN 2012 (IN DOLLARS) Cost Type Payroll costs Raw material costs Employee benefit costs Utility costs Repair and maintenance costs Other costs Direct Costs 49,625 65,753 18,283 5,369 6,875 5,988 Allocated costs from: A&A 3,045 857 1,290 1,580 1,176 1,206 T&E 1,903 2,470 782 345 651 223 M 761 1,408 364 107 262 517 Total activity cost 55,334 70,488 20,719 7,401 8,964 7,934 TABLE XIII COST PER GUEST USING ABC IN 2012 (IN DOLLARS) Total costs No. of sold rooms No. of served meals Housekeeping cost per room Restaurant cost per served meals Total cost Cost type Housekeeping Restaurant per guest Payroll costs 87,585 55,336 32,028 201,880 2.73 0.27 3.01 Raw material costs 55,309 70,489 1.73 0.35 2.08 Employee benefit costs 36,714 20,719 1.15 0.10 1.25 Utility costs 57,989 7,401 1.81 0.04 1.85 Repair and maintenance costs 52,931 8,964 1.65 0.04 1.70 Other costs 42,083 7,934 1.31 0.04 1.35 Total costs 332,611 170,843 10.39 0.85 11.2

2. The discussion on the journal articles must include the following items:

a. Introduction.

b. Issue raised in the article journal.

c. Strategic Cost Management System (SCMS) used.

d. Results and discussions obtained.

e. conclusion