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and process variety—where excellence in manufacturing
process was not critical for success—a single
costing system might have sufficed” (p. 2). But clearly,
this is no longer possible now because, Kaplan and
Cooper (1998: p.1) argues, changes in business since
the mid-1970s triggered by global competition and
technological innovations have led to the striking
innovations in the use of financial and non-financial
information in organisations. Organisations, therefore,
in a bid to find their own niche, must undertake
journey through the four sequential stages illustrated
by Kaplan and Cooper (1998 : p. 12).
In relation to the four-stage model of cost system
design, an analysis of the USALI would reveal that it
is apparently a disciplined approach to producing a
clear, usable information for performance evaluation
of the different areas of hospitality business (Quigley
and Angwin, 2011), but a deeper analysis would reveal
that so far as the information need of the management
is concerned, at best it represents a transition from
Stage I to Stage II in the cost management system design
suggested by Kaplan and Cooper.
For instance, De Franco (1997) has found that allmost
all the hotels use traditional budgets for planning
annual operations, controlling of costs, and for
coordinating activities of various parts of the hotels.
About half of the companies use zero-base budgets,
while a few use flexible budgets (Schidgall et al, 1996).
Most USALI users make use of traditional, profitability
measures for performance evaluation, e.g.
● Average Room Rate = Rooms Revenue divided
by Rooms Occupied
● Average Food Check = Total Food Revenue
divided by Number of Covers (i.e. guests served in
the food operation during the period).
In order to have a proper check on the inventory
of rooms and their utilizations, USAL has recently
started using a new indicator called RevPar (which
stands for revenue per available room). RevPar is
calculated as Room revenue divided by total rooms
available. USALI uses the entire inventory of rooms
as a denominator (including those not ready for use)
to indicate whether the inventory of rooms is being
managed properly. In a recent survey by Pavlots
et al. (2007) have found that a majority of the hotel
organizations have been using traditional cost
accounting system like absorption costing and costvolume-profit
(CVP) analysis, with quite a few using
standard cost accounting system.
Hospitality organisations are basically service
organisations. However, notwithstanding the
observation of Kaplan and Cooper (1998 : P. 231) that
service companies are ideal candidates for activity-
based costing, the results of many surveys, however,
indicate that the use of activity-based costing in the
hotel organisations is very few and far between.
As a service industry, hospitality industry has a
high proportion of fixed costs, with approximately
three-quarters of the total cost of hotels being
uncontrollable (Kotas, 1997). The room department
has a fixed cost of 15-20% in relation to its sales
volumes, while food and beverage operations entail
relatively high fixed costs in the form of kitchen and
restaurant wages. This means that allocation of costs
can have a significant impact on determining the
financial performance. The merits of activity-based
costing over the traditional cost accounting method
has been extolled, amongst others, by Kaplan and
Cooper (1998) and Shank and Govindarajan (1993).
But unfortunately, with all the glaring defects of
improper and misleading cost allocation of traditional
cost accounting system, activity-based costing plays
second fiddle in the hospitality organisations. The
consequence of such action is well demonstrated by
Tsai et al (2010) who have recently studied the
advantage of using ABC of a country inn in Taiwan.
The study gives better insight into the customer costs
for each market segment in order to offer more
accurate cost information for innkeepers to make
better managerial decision. Also, this study compares
the ABC with the traditional costing method, and
concludes that the ABC method is a more suitable
and appropriate tool than traditional accounting
method in a country inn.
Exhibit # 3. Comparing ABC with Traditional
Accounting
N.T. Dollars
Cost
Traditional accounting
allocation :
Lodging
Product
Hot-Spring Dining
Overhead 99,640 597,842 1,693,885
(Assigning by direct labor hours) (240hr) (1440hr) (4080hr)
Direct Labor 30,000 180,000 623,000
Direct Materials 61,137 116,843 1,032,498
Outside laundry 33,000
Hot-spring water
Total cost on traditional
5,049
accounting basis 223,777 899,734 3,349,383
Mean number of customers 1,440 56,750 33,240
Unit cost per customer 155.4 15.85 100.76
Unit cost per customer in ABC 306.21 31.64 67.28
The Management Accountant |September 2011 755