Professional Documents
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Jurnal 7 CPA Dalci2010
Jurnal 7 CPA Dalci2010
www.emeraldinsight.com/0959-6119.htm
Customer
Customerprofitabilityanalysis profitability
withtime-drivenactivity-based analysis
costing:acasestudyinahotel
609
Ilhan Dalci
Eastern Mediterranean University, Famagusta, Turkey Received 15 April 2009
Veyis Tanis Revised 1 September 2009,
22October 2009,
Business Administration, C¸ukurova University, Adana, Turkey, and1 December 2009
Accepted 13 December 2009
Levent Kosan
Silifke Vocational Business School, Mersin University, Mersin, Turkey
Abstract
Purpose – The purpose of this paper is to show the implementation of customer profitability
analysis (CPA) using time-driven activity-based costing (TDABC), in a Turkish hotel.
Design/methodology/approach – A case study was conducted in a four-star hotel with 100-room
capacity in the C¸ukurova region of Turkey. Interviews, direct observations, and documentation
collection were used to collect the data.
Findings – The results showed that some of the customer segments which were found unprofitable
under the conventional ABC method were determined profitable using TDABC. The case study also
revealed the cost of idle resources devoted for front office, housekeeping, food preparation, and
marketing activities.
Researchlimitations/implications– Only a single hotel operating in Turkey is examined in this
paper. Further research should focus on implementing CPA using TDABC in other hotels in Turkey
and abroad.
Practicalimplications – Based on the results of the study, the hotel management is better able to
understand profitability of different customer segments and implement appropriate strategies.
Moreover, the time equations of TDABC are considered to provide hotel management with an
opportunity to better balance the capacities supplied in departments.
Originality/value– There is limited research relating to profitability analysis in service companies
in general and in the hotel industry in particular. Therefore, this paper is unique in the sense that it
analyzes the use of TDABC systems for CPA within a real case hotel.
Keywords Activity based costs, Profit, Customers, Hotels, Turkey
Papertype Case study
1. Introduction
Customer cost information is essential for managerial decision making. Therefore,
understanding true costs of serving specific customers is important in any organization.
International Journal of
Companies that understand which customers are more profitable and whichContemporaryones areHospitality
not, are armed with valuable information needed to make successful managerial Management
Vol. 22 No. 5, 2010
decisions to improve overall organizational profitability
et al.
, 2003).
(RaaijCotton (2005) pp.609-637
and Cooper and Kaplan (1991), also suggest that understanding how current customer
q Emerald Group Publishing Limited
0959-6119
relationships differ in profitability enables managers to make better managerial
DOI 10.1108/09596111011053774
IJCHM decisions. However, obtaining accurate information about customer profitability
necessitates the use of an appropriate costing system.
22,5 Customer profitability analysis (CPA) entails allocation of revenues and costs to
specific customers in a way that the profitability of individual customers can be
calculated. Owing to the increased size and organizational complexity of service firms,
Kaplan and Narayanan (2001) state that understanding CPA is especially important for
610 service companies. Indeed, for service companies, CPA is more important than
production companies because the cost of providing a service is generally determined
by customer behavior. According to Zeithaml and Bitner (1996), the cost of finding and
gaining a new customer in service companies is five times greater than the cost of
retaining current customers. Therefore, successful implementation of CPA in order to
retain profitablerelationshipswith currentcustomersis essentialfor service
companies. Moreover, Cotton (2005) asserts that the effective use of CPA enables
service companies to increase customer satisfaction and boost profitability.
According to Cooper (1988), the use of activity-based costing (ABC) enhances the
traditional contribution margin approach and the quality of CPA. The ABC system
was promoted by Cooper and Kaplan in the mid-1980s, as an alternative costing
system to the traditional one, based on their experiences with some production
companies in the USA (Gunasekaran and Sarhadi, 1998). Subsequent studies dealt with
the deficiencies of traditional costing systems in automated production environments
(Innes, 1999; Baird
et al.
, 2004). The activity-based approach to overhead costs is an
extension of the traditional volume-based costing that treats manufacturing overhead
as a complex set of costs with multiple cost-driverset al.
(Drake
, 2001). Rotch (1990)
points out that the conditions necessary for manufacturing firms to successfully
implement ABC are necessary for service companies as well.
The ABC approach assumes that products or customers generate activities, and the
activities consume resources (Cooper, 1988). ABC is based on a two-stage allocation
process. First of all, the costs of resources are allocated to the activities using first-stage
cost drivers, and then the costs of activities are apportioned to cost objects by means of
volume and non-volume related drivers (Cooper, 1990). That is, the activity costs are
allocated to the cost objects based on the relevant cost drivers (i.e. number of machine
hours, number of setups, number of design specifications, and number of customer
visits). The cost drivers are linkage between activities and cost objects (Cooper, 1988,
1990; Cooper and Kaplan, 1992). The rise of ABC has led to the understanding that not
every customer consumes the same level of activities and resources. Moreover,
resources that particular activities consume are measured in terms of cost driver units.
This is due to the fact that, while traditional cost systems rely on arbitrary cost
allocations of overhead costs, ABC classifies cost pools according to the activities (unit,
batch, product, and facility levels) performed within the organization (Kaplan and
Cooper, 1988). Understanding the hierarchical levels of the costs of ABC enables
managers to better understand cost causation, and hence make better decisions. Thus,
with ABC, managers are better equipped to understand which customers are profitable
and which ones are not (Kaplan and Cooper, 1998). Additionally, according to Cooper
and Kaplan (1992), the use of ABC by organizations has led to increased profitability.
Despite the fact that the ABC system can be a sufficient costing method, it has some
drawbacks. First, due to complexity of the activities performed within organizations,
ABC may take too much time to be implemented (Kaplan and Anderson, 2004). Second,
when activities, that contain more than one subtask with different cost drivers,Customer
are
intensified, ignoring that complexity may result in the misallocation of the costs. Third,
since the ABC system needs to be updated regularly, it becomes too costly to
profitability
re-interview and re-survey people engaged in the activities (Kaplan and Anderson, analysis
2004). The downsides of traditional ABC system alerted Kaplan and Anderson to
introduce a new costing method called time-driven ABC (TDABC) system to address
the above-mentioned limitations. However, using TDABC in order to bring solutions 611 to
the problems of conventional costing systems does not mean that ABC should be
completely abandoned. Proponents of TDABC argue that it removes time-consuming
and costly interviewsand surveyswhich have beena major barrierto the
implementation of a traditional ABC system, as well as it allows cost driver rates to be
calculated based on the practical capacity of the resources supplied (Kaplan and
Anderson, 2007b).
Under a traditional ABC system, the costs of activity-cost pools, are apportioned
amongst cost objects using activity drivers (Kaplan and Cooper, 1998). On the other
hand, under a TDABC system, these costs are allocated to the cost objects on the basis of
time units consumed by the activities (Kaplan and Anderson, 2004). The TDABC
approach requires identifying resources needed to perform the activities, as it is done
under a traditional approach. It also requires time needed to perform the activities and
the practical rather than the theoretical capacity of the resources supplied. Theoretical
capacity equals the theoretically available working minutes, whereas practical capacity
is expressed as the amount of time that employees can work without idle time (Kaplan
and Anderson, 2007a). The practical capacity of the resources excludes the time that
employees spend on activities (such as having a rest and taking a break) which are
unrelated to actual work performance. Two important aspects of a TDABC system are:
estimating the practical capacity of the resources supplied and the cost of these
resources. Dividing the total cost of resources supplied by the practical capacity yields
the cost per time unit. Then, the time needed for performing the activities is multiplied by
the cost per time unit in order to assign the costs to products or customers. With the help
of the time equations of TDABC, the time needed to perform an activity can be estimated
without any need to continually re-interview people. These time equations can include
multiple time drivers if an activity is driven by more than one driver. Obviously, the
TDABC approach, with its time equations, makes it possible to know how many minutes
that staff members spend on activities in a particular time period. Therefore, the time
equations of TDABC can provide larger transparency than a traditional ABC system.
With TDABC, it is also possible to pinpoint which customers consume the largest
amount of time and resources (Kaplan and Anderson, 2004).
Research conducted on the analysis of costing systems, in the service industry in
general and the tourism industry in particular, is very limited. There has also been
little innovation regarding cost accounting practices in the hospitality industry (Potter
and Schmidgall, 1999).etFayal.(1976) demonstrated the use of conventional costing
systems in the hospitality industry. Nordling and Wheeler (1992) implemented CPA in
the Hilton Hotel in Las Vegas. However, analysis of the activities in allocating the
overhead costs was not completed in that study. Although the use of ABC in the
application of CPA in the hospitality industry has attracted little interest, there has
been detailed research about costing practices in tourism enterprises after 1999. In a
case study conducted in a hotel by Noone and Griffin (1999), activities were determined
IJCHM at macro and micro level and the cost of these activities were assigned to specific
customers using ABC. Raab and Mayer (2003), surveyed restaurant controllers in the
22,5 USA and they found that the use of ABC was almost non-existent in the restaurants.
They also discovered that the use of ABC could be appropriate for the restaurants due
to the characteristics inherent in the restaurant industry.
et al.(2005)
Raab tested a
model for ABC in a buffet style restaurant in Hong Kong. Raab and Mayer (2007)
612 analyzed how menu engineering (ME) can be integrated with ABC to determine
whether or not the integration of ME with ABC can boost the profitability of a dinner
buffetin a restaurantin Hong Kong. Ultimately,Raab et al. (2009)applied
activity-based pricing in a restaurant setting. The findings of that study show that
ABC could be used by restaurant managers to better analyze the cost structure of their
restaurants.
Nevertheless, there are many issues, relating to cost and management accounting
practices in the hospitality industry, that deserve research attention (Pellinen, 2003;
Dittman
, 2008).
et al.
Several researchers as mentioned above have advocated the use of
ABC in the hospitality industry. However, the costs of activities have not been
analyzed using TDABC in the hospitality industry even though this method has been
applied in other industries. et Pernot
al.
(2007) used a case study in a university to show
how to use a TDABC system for inter-library services. They argue that TDABC can
improve the cost management of all library services because it enables library
managers to take appropriate actions to reduce the time needed for specific requests of
library customers. Everaert
et (2008)
al. described a case in a distribution company and
showed that ignoring the complexity of activities containing more than one subtask
with different time drivers, resulted in a misallocation of 54 percent of the costs when
the traditional ABC system rather than a TDABC approach was used. In a recent
study, Demeere et al.(2009) showed how to implement a TDABC model for five
outpatient clinic departments through a case study. They uncovered that the use of a
TDABC system provided the healthcare managers and physicians with valuable
information which assisted them in operational improvements, making profitability
analysis for departments, and deciding on future investments.
The general aim of this paper is to show the implementation of CPA with TDABC in
a hotel operating in the C¸ukurova region in Turkey. The case hotel is located in the city
of Mersin. The city of Mersin is important for the region’s economy because trade
among Turkey, the Middle East, and Europe takes place through the Mersin Port.
Therefore, most of the businesspeople conducting business through the Mersin Port
prefer to stay in the hotels which are located in the city. Thus, hotels have significant
impact on the economic development of the C¸ukurova region. In that respect,
implementing CPA successfully for accurate and effective managerial decision making
is important for the managers of the hotels located in this region.
2. Thecasestudyandresearchdesign
This study adopted both convenience and purposive sampling techniques to select the
research sample (Altinay and Paraskevas, 2008). One of the co-authors of this study
previously worked for the hotel to have experience during his summer holidays. Thus,
he knew the managers and asked for permission to conduct a research of this kind.
He met the hotel’s managers for a preliminary discussion and he realized that the
case hotel was measuring customer profitability by using a traditional ABC system.
Then, he explained to the managers the benefits of conducting this case studyCustomer
in their
hotel. The managers of the hotel accepted to give permission for the research with a
profitability
condition that, due to confidentiality reasons, the hotel’s name should not be disclosed
in the paper. This request was taken into account and the researchers commenced analysis
the
study in the hotel and concluded it within one year.
The physical and environmental information about the hotel is as follows: it is a
four-star hotel operating with 100 rooms in the C¸ukurova region in Turkey. The hotel 613
operates at an annual occupancy rate of 60 percent. In addition to a banqueting hall,
steam bath, meeting room, bar, and business centre facilities, various other services
which are suitable for four-star hotel standards are also offered in the hotel. The case
hotel employs 53 personnel (one general manager, one assistant general manager, four
front office clerks, seven housekeepers, 30 restaurant staff, two marketing personnel,
three bartenders, two accounting personnel, and two human resource managers).
Our study in the case hotel started in September 2006 and ended in September 2007.
The data presented in this case study represent real figures gathered throughout the
one-year period. All the data presented in this study are expressed in US$. The cost
data were compiled during a three-month (September, October, and November) period
in 2006. In order to compile consistent data regarding the time spent on the activities,
needed for deriving the time equations used in the TDABC model, we observed the
actions of the personnel while they were performing the tasks several times during
the year of 2007. Additionally, we conducted follow-up interviews during the last three
months of the study in 2007 in order to verify and validate the accuracy of the data. By
comparing the results we obtained at different times, we computed the average times
for each of the activities. Moreover, documentation was collected from financial reports
in order to gain a rich description of the hotel’s costing system and to understand how
managers implement CPA. All of the above-mentioned case study applications were
conducted with the following theoretical background and literature.
A qualitative research strategy was used as the most appropriate method for a case
study of this kind because case studies are often associated with qualitative research
design even though they can be conducted with both qualitative and quantitative
research methods (Yin, 1994). According et to
al.
(2007),
Ryan Lee (1999) and Yin (1994),
case studies provide the researchers with an opportunity to understand the nature of
accounting systems which are currently used in practice. Moreover, case studies could
be used to explore the application of new procedures. As suggested by Yin (1994), case
studies investigate a contemporary phenomenon in its real-life context and more than
one case can be conducted at a time. Since the main purpose of our study was to
understand the costing system currently applied and to evaluate the applicability of
TDABC in a hotel setting, the case study method was deemed to be the most appropriate
method to gain in-depth understanding of the hotel. In the study, a descriptive case study
was first used in order to explicate the accounting system currently used in the case
hotel. Then, we used an experimental case study method in order to evaluate the
applicability of the new costing system (TDABC) in the hotel.
We used qualitative research methods for gathering data regarding the costing
method currently used by the hotel’s accountants, activities performed in the hotel, unit
times needed for performing the activities, and detailed costs of these activities.
Semi-structured interviews that lasted between 45 minutes and one hour with the
personnel of the hotel (i.e. general manager, general assistant manager, cost accountant,
IJCHM receptionists, housekeepers, marketing personnel, and waiters), direct observations, and
documentation collection were used as data-collection methods. Semi-structured
22,5 interviews were chosen because they enable the researchers to understand the issues in
depth (Bryman and Bell, 2007). The interviews were conducted based on a detailed
interview schedule that was agreed upon with assistant general manager of the hotel.
The interviewees were asked closed-ended as well as open-ended questions on issues
614 relating to main activities performed in the hotel, the tasks performed by each staff
member, type of costs incurred, and the customers of the hotel. The purpose of those
interviews was to clarify how staff members performed their tasks and how much
time (in terms of minutes) they spend on performing these tasks. Direct observations
were also used to examine the activities while the staff members physically perform the
tasks. As suggested by Tharenou
et al.(2007), observations are important tools for
understanding the procedures. In that respect, we conducted observations in order to
ensure that the data gathered through interviews accurately reflected the real time
experiences of the employees. After each visit to the relevant department, we wrote up
notes in order to analyze the nature of the activities. We also documented the tasks
performed by the staff members. All the interviews were recorded on tape, and the data
obtained through these interviews were filed. We transcribed all tapes and notes and
read the transcripts several times in order to make thorough activity analysis. The cost
data were obtained from the cost reports documented by the accounting department. We
used the cost reports to get an insight into the costing system currently employed by the
hotel’s cost accountants (Tables I and II).
We also utilized job descriptions in reviewing the tasks. In addition, we analyzed the
annual reports of the hotel in order to analyze revenues generated from accommodation
and other revenue generating areas, especially food and beverage spending. We
developed time equations using the data concerning the tasks and unit times needed to
perform these tasks. Based on the time equations that we formulated and the cost data
provided by the accounting department, we allocated the costs to customer segments
using TDABC. Ultimately, we computed profitability figures for the customer
segments using TDABC and compared TDABC results to the ones found under the
conventional ABC, as presented in Tables V and VI.
Marketing
$16,400
$26,288 $54,977
$2,825 $9,960
12%
Housekeeping
hours square
$28,500 $168,656
$68,945 13,776 $84,231 $42,330
meters
1,660 51%
$34,404
$9,260 $2,031$11,850 square
$6,590 $11,620
meters
Front
office 233.5 14%
hours
usage usage
and hours square of
driver percentage
Estimated
Laundry
cleaning
Direct Actual 23,040
Direct
Direct Actual
Direct
Direct meters
Cost Area 4,360 time
($) 156,660
265,281
177,106
403,213
282,076
3,840
9,415
54,977221,235 83,000
Total
costs
insurance
laundry
beverage TableI.
building
and resources
Entertainment Costs allocated to
and
Depreciation
centers depreciation customer groups under
Personnel
and Stationary
Telephone
Marketing traditional ABC
Cleaning Energy, Human (allocation of costs to
Cost Food activity-cost pools)
IJCHM Banqueting
squareorders
minutes
22,5 $12,500
$7,297 meters $15,200
19%5,000
468,241
3,487
11 50
preparation
Beverage squareorders
$37,000
$13,600 minutes
413,782
616 $6,634 meters 29,137
20,321
148 17%
10
preparation
squareorders
$13,268 meters
$18,000
$16,000 minutes
381,349
11,800
8,230
Food 20%
20 72
Marketing
$12,000 minutes
124,450
15%2,000
1,395
Housekeeping
squareorders
$52,410 meters
$88,103
$12,000 minutes
579,208
34,033
23,735
352 15%
79
orders
$10,000
$11,200 minutes
$28,150 125,105
Front
office 19,632
14%
40
pool $250/order
663.41/ $1.4339/
minute
square
meter
Cost
rate
occupied minutes
Maintenance
driver squareorders
percentage
Estimated
Orders
Space meters oftime 76,800
Cost 120 662 time
and
maintenance
finance)
(administrating
and
centers Purchasing and
accounting
General ($)
Storing Repair
TableI. Cost Total
8
Group
7,825
150 413,782
421,607 Customer
profitability
analysis
7 2,183
Group 314 5,792
314 501
10 3,090
548 11,566
617
6 1,203
24 468,241
469,444
Group
5 10,913
1,570
68,990
3,739
802
16 90,236
16,008 170,941
Group
4 26,192
3,767
48,058
2,767 40,969
7,268 115,219
Group
3 8,730
1,256
90,414
4,900
15,042
300 32,412
5,750 149,568
Group
2 41,468
5,964
84,934
4,603 104 58,364
5,214 10,354 189,980
Group
1 35,619
5,123
278,020
15,067
93,863
1,872
156,278
27,724 563,780
Group
6.952918.45225
50.140
5.63692
Total
125,105
17,993
579,208
31,3902,482
124,450
381,349
67,652
413,782
468,241
visits
($) ($) ($) ($)
rate rate customer
rate rate
($)arrivals
($)nights
($) ($)covers
($)($)
cost driver
cost driver
cost driver
cost driver
cost
cost
of Total
Total of Total
of Total
of Total
No.CostNo.
CostNo. CostTotal
CostNo.
preparation TableII.
preparation Costs allocated to
customer groups under
Housekeeping traditional ABC
office Banqueting
Activities Marketing Beverage (allocation of costs of
($)
activity-cost pools to
Front Food Total customer groups)
IJCHM .
GroupThese
4. customers are “walk-in” customers coming to the hotel without
making reservations. This customer group used accommodation and food and
22,5 beverage services and had a 12 percent share in the total sales mix.
.
Group Professional
5. sport clubs coming to the city of Mersin to play football
matches constitute this group. Customers in this group stayed in the hotel for one
or two days and had a 10 percent share in the total sales mix.
618 .
Group 6.This customer group comprises people who organize parties and
wedding ceremonies in the hotel. Customers in “group 6” received catering and
entertainment services and did not stay overnight in the hotel.
.
Group
These7.customers come to the hotel to participate in wedding ceremonies
and parties and stay in the hotel for just one night. This group had a 1 percent
share in the total sales mix.
.
Group 8.Customers who come to the hotel only for bar and entertainment
services are clustered in this group. These customers do not stay overnight in the
hotel.
Activities performed in the case hotel
In the case hotel, we identified six general activities. Each of these activities comprises
several subtasks (sub-activities). These activities and the related subtasks are:
marketing (making calls to customers in order to arrange visits, giving information via
e-mail or fax, making customer visits, advertising, and making promotional campaigns),
front office (reservation and information, check-in and check-out, meeting and
welcoming customers, settling customers in the rooms, opening customers’ accounts,
controlling customers’ spending, accompanying customers when they are leaving, and
closingcustomers’ accounts), housekeeping(cleaningthe rooms,makingbeds,
vacuuming, and replenishing linens), food preparation and service (taking orders,
preparing the kitchen for breakfast, lunch, and dinner, cooking, preparing and serving
breakfast, lunch, and dinner, cleaning the kitchen and the restaurant), beverage
preparation and service (preparing the bar for beverage service, servicing the beverages,
carryingout entertainment activities,and cleaning),and banqueting(making
preparations for catering events such as wedding ceremonies, parties, and meetings).
The case hotel employs four receptionists to do the front-office work and normal
working hours (theoretical capacity) for each person is around eight hours and
minutes
15 per day. Each receptionist works six days a week and 26 days in a month.
In this case, normal working hours for one receptionist corresponds to 12,870
½ð8:25 hour£ 60 minutes
Þ£ 26 days minutes per month and 154,440 minutes per
year. Thus, the theoretical capacity for four receptionists is 617,760 minutes per year.
However, each receptionist spends around 75 minutes for breaks, arrival and
departure, and resting every day. Therefore, each receptionist actually works only
seven hours (which is practical capacity of one receptionist) per day. In this respect,
each receptionist practically supplies about 10,920 minutes per month or 131,040
minutes per year. Therefore, the practical capacity of 4 receptionists is about 524,160
minutes per year. Hence, the practical capacity corresponds to around 85 percent
(524,160/617,760 minutes) of the theoretical capacity.
Allocated
6,593
cost21,39716,184
25,6234,308
1,274
1,425
1,146
77,950 Customer
profitability
analysis
0.23868
0.23868
($/min) 0.23868
0.23868
0.23868
0.23868
0.23868
0.23868
Rate
minutes
Total 89,653
27,632
67,806
18,049
107,352 5,338
5,970
4,800
326,600 623
quantity
Activity
5,123
5,964
1,256
3,767
1,504
314
11,940
1,920
31,788
(minute)
Totaltime 17.5
unit 0.52.5107.5
1822181217
spentaccompanying
time (check-out)
customer
on
(minute) 2 2 3 4 2 3 0 0 6
1
Unit
time the
oncontrolling
customer’s
spending
(minute) account
spent andclosing4 2 4 4 2 3 0 0 9
Unit 1
time customer’s
(check-in)
onopening
(minute) account
spent 1.51.51.5 1.5
Unit 1 1 0 0 8
time customer
onsettling
(minute) (check-in)
theroom 2.52.5
spent 2 2 1 2 0 0 12
Unit in
Time onwelcoming
(check-in)
customer
(minute)
spent 1.5 0.5
Unit 2 2 3 1 0 0 10
time information
on activity
(minute)
spent 2.53 3 4 4 3 0.50.520.5
Unit
time reservation
on activity
(minute)
spent 4 5 6 0 1 4 0 2 22
Unit
TableIII.
Customer Costs of front office
1 2 3 4 5 6 7 8 activities allocated under
groups
Group
Group
Group
Group
Group
Group
Group
Group
Total TDABC
IJCHM The cost per minute of capacity supplied is calculated by dividing the cost of capacity
supplied by the practical capacity of resources (Kaplan and Anderson, 2004). Thus, we
22,5 calculated the cost per minute of supplying capacity for the “front office” activities as
$0.23868 [$125,105 (Table I)/524,160 minutes]. Then, the rate of $0.2368 per minute
was multiplied by the total time (in terms of minutes), needed for each customer group,
in order to allocate the costs of the “front office” cost pool to the customer segments.
624 As revealedby the calculations,around 62 percent[326,600minutes
(Table III)/524,160 minutes] of the practical capacity of the resources supplied for
the “front office” activities had actually been used for productive work during the
study period. Hence, only 62 minutes ($77,950/$125,105) of the total cost of $125,105
was assigned to the customer groups using TDABC. In this case, the total cost of
unused resources supplied to perform the “front office” activities was computed as
$47,155 ($125,105
2 $77,950).
153,690
166,992
minutes
Total
37,680
120,544
78,500
8,792
566,198 625
quantity
Activity
5,123
5,964
1,256
3,767
1,570
314
17,994
time
(minute)
Total 302830320
5 28198
unit
linens
(minute) customer
cleaning
and hotel
replenishing
rooms the 161616183
1 16113
time
on theleaves
spent
Unit the after
the linens
(minute) customer’s
cleaning
and
replenishing
stay4 4 4 4 4 4 24
timerooms
on during
Unit
spent
the
(minute)
cleaning
check-in)
room
vacuuming
7 6 7 7 116 44
reserved
time
on (before
spent
Unit and
controlling
(minute)
room
check-in)
reserved
3 2 3 3 4 2 17
time
on (before
spent
Unit the
TableIV.
Customer Costs of housekeeping
1 2 3 4 5 7 activities allocated under
groups
Group
Group
Group
Group
Group
Group
Total TDABC
IJCHM column) and derived the following time equation for the “housekeeping” activities
(customers clustered in groups 6 and 8 are not included in the equation because these
22,5 customers do not stay overnight in the hotel):
Total timeðminÞ for housekeeping activities
¼ ð30*#customersÞ½if customergroup 1 þ ð28*#customersÞ½if customergroup 2
626 þ ð30*#customers Þ½if customergroup 3 þ ð32*#customersÞ½if customergroup 4
þ ð50*#customers Þ½if customergroup 5 þ ð28*#customersÞ½if customergroup 7
As previously presented in Table I, the total cost of the “housekeeping” activities was
$579,208. Dividing this amount by the practical capacity of 851,760 minutes per year
resulted in a cost of $0.68 per minutes as the cost of one time unit of the “housekeeping”
activities. The rate of $0.68/minute was then multiplied by the total minutes, spent for
each customer group, in order to apportion the costs of the “housekeeping” activities to
the customers.
The use of TDABC reveals that the cost of unused resources, devoted for the
“housekeeping” activities, was $194,193 [$579,208 (again
2 $385,015].
Table I)This is
due to the fact that, only 66 percent (which was calculated by dividing 566,198 minutes
by the practical capacity of 851,760 minutes) of the practical capacity of the resources
supplied for the “housekeeping” activities had been actually utilized during the study
period.
22,5
direct
Totalcosts 9,013
7,654
30,4469,405
7,516
18,881
82,915
628 allocated
39,333
23,477
121,92330,405
52,715
10,640
278,493
indirect
Totalcosts
($/min)
Rate 0.07
0.07
0.07
0.07
0.07
0.07
of spent
lunch,
(sum
dinner)
minutes 1,741,786
561,916
335,368
434,384
753,056
152,000
3,978,510
breakfast,
minutes
totaland
Total
thefor
VI
spent
Table
“u)
minutes 419,485
column80,878
59,616
74,304
331,512
965,795
(see
dinner
Total–
for
VI
spent
Table
“n”)
minutes 68,685
3,888
14,608
27,072
224,112
338,365
column
(see
lunch
Total–
for
spent
column
(see
breakfast1,253,616
minutes 477,150
261,144
333,008
197,432
152,000
2,674,350
– “g”)
VI
TableV. TotalTable
for
Cost of food preparation
activities allocated under
TDABC (allocation of Customer
costs of food preparation 1 2 3 4 5 7
groups
Group
Group
Group
Group
Group
Group
activities under TDABC) Total
total
needed
reakfast
total
needed total
needed Customer
61,144
33,008
1,253,616
477,150197,432
152,000
2,674,350 ,888
68,685
14,608
27,07238,365
224,112 dinner
419,485
80,878
59,616
74,30465,795
331,512
f} m} lunch
t} profitability
£ minutes £ minutes 3 £ minutes
{a b
for
2 3 h or 3 o
{ for 9 analysis
{
(g) (n) (u)
breakfast (
( ( dinner
time and 0
1 8 10105 6 9
4 time and
lunch
5
3 344
3 4
3 8 125 time and 459
3 93 4
4 8 175
for for for
order order order
Unit
needed Unit
needed Unit
needed
Advertising 631
(direct)
costs 3,185
2,123
10,6141,062
2,123
2,123
38,769
59,999
to customers
of customer 1,196
2,760
12,918
allocated
visits 0 166 460
863
18,363
Cost
($/min.)
Rate 0.23
0.23
0.23
0.23
0.230.23
0.23
minutes
Total 56,168
5,200
12,000
0 720 2,000
3,750
79,838
of (activity
quantity)
Totalvisits 1,652
100 0 6
240 0 2,198
number 1 4 150
(minute)
Totaltime 4 2 0 0 5
unit 0
3 5 5 4 5 5
2 256
time customer
onvisiting
(minute)
spent 0 3 5
4 5
4 0 0
4 3
4 1
2 224
Unit
spentto
timegivingcustomer
information
(minute) 2 3 3 0 2 3 2 15
Unit
on
spent
arranging
appointment
time
(minute)2 4 2 0 3 4 2 17
Unit
on
TableVII.
Customer Cost of marketing
1 2 3 4 5 6 8 activities allocated under
groups
Group
Group
Group
Group
Group
Group
7 Group
Total TDABC
and
IJCHM Total timeðminÞ needed for making customer visits
22,5 ¼ ð34*#customers
Þ½if customergroup 1 þ ð52*#customersÞ½if customergroup 2
þ ð50*#customers Þ½if customergroup 3 þ ð45*#customersÞ½if customergroup 5
þ ð50*#customers Þ½if customergroups6 & 7
þ ð25*#customers Þ½if customergroup 8
632
Table VII summarizes the dollar amount of the costs of advertising, promotion, and
customer visits which were assigned to each customer group using TDABC. Since
79,838 minutes of the practical capacity of 262,080 minutes had actually been used for
making customer visits, around 30 percent (79,838 of 262,080 minutes) of the
“marketing” resources had been used for productive work during the study period. In
this case, the total cost of unused resources devoted for the “marketing” activities was
computed as $41,750 ($124,450
2 $82,700).
3. Interpretationoftheresults
In this case study, we have developed a TDABC model for the case hotel in order to
implement CPA. Table VIII compares the profitability figures computed by means of
the traditional and TDABC systems. The figures in the “total cost” column in the
“traditional ABC” section of Table VIII are taken directly from the “total” column of
Table II. The figures calculated for customer groups 1, 2, 3, 4, and 5 in the “total cost”
column in the “TDABC” section of Table VIII are obtained by summing up the figures in
the “total cost” columns in Tables III-VII. The “total cost” figure for “customer group 6”
and “customer group 7” is obtained by adding up the relevant figures in the “total cost”
columns in Tables III-VII and the total cost of “banqueting” activity-cost pool ($468,241).
On the other hand, the “total cost” figure for “customer group 8” is found by adding up
the relevant figures in the “total cost” columns in Tables III and VII to the total cost of
“beverage preparation” activity-cost pool ($413,782).
In Table VIII, the revenue figures for customer groups 1, 2, 3, 4, and 5 are obtained by
summing up the restaurant and accommodation revenues. For example, the total amount
of revenue ($948,385) generated from “customer group 1” is obtained by summing up
accommodation ($807,602) and restaurant revenues ($140,783). The total amount of the
restaurant revenue ($140,783) is calculated by totaling breakfast, lunch, and dinner
revenues. Since the “banqueting” activities are organized for only “customer group 6”
4. Conclusionsandmanagerialimplications
What does this all mean for the hospitality industry? First, there is support for the
TDABC model which incorporates activities, cost of resources supplied for the
activities, practical capacity of the resources devoted for performing the activities, and
the unit times spent on these activities. In that respect, the study produced valuable
information which will support various managerial decision makings. First, these
findings will allow the managers of the hotel to tailor the cost system strategies more
effectively. Each of the activities and unit times are adaptable for a TDABC model,
allowing the managers of the hotel to determine where they need to improve their
productivity and see how these improvements will affect the external value and overall
profitability of the organization. It seems that ABC is a necessary, efficient, but not
sufficient measurement tool for profitability analysis. More importantly, it ignores the
importance of the cost of unused resources assigned to different customer segments.
Moreover, the managers of the hotel should remember that tracing the cost of some
activities to customers using a traditional ABC approach may not be feasible due to the
diversity in the use of resources by various customers. If the managers of the hotel
want to install and implement a TDABC method for CPA in the subsequent periods in
order to overcome the limitations of a traditional ABC system, all they need is obtain
estimates for the costs of the activities that are performed in the hotel, as well as
average times needed to perform these activities. The estimates of the times, which are
needed for performing the activities, can be obtained via the time equations we
IJCHM developed in this case study. In that respect, based on the practical capacity of the
resources supplied, the costs of the activities, and the time estimates for the activities,
22,5 the hotel management will be able to executeCPA via a TDABC model.
In implementing a TDABC model, the cost of activities should be divided by the
practical capacity of the resources, which is expressed as the amount of time that
employees (i.e. receptionists and housekeepers) can work, in order to compute the cost
634 per time unit for each activity. Costs then can be assigned to customers by multiplying
the cost per time unit by the time needed to perform the activity for each customer. The
time equations will also provide the management with a chance to update the TDABC
system quickly without any need for repetitive interviews. In this regard, not only will
the use of a TDABC system provide the managers with an insight into more accurate
CPA information, it will also make the unused capacity visible.
Second, there is a clear evidence indicating that the front office, housekeeping, food
preparation, and marketing departments have idle capacity. It is a well-known fact that
the hospitality industry is labor intensive and that personnel have a major impact on
the profitability of the hotel. In this case, the managers of the hotel should concentrate
on uncovering appropriate strategies for maximizing capacity utilization. For instance,
one starategy they can utilize might be to provide the personnel with necessary
training and motivation to follow and answer the needs and expectations of the
customers in order to attract more customers and to eliminate the idle capacities in the
future. Depending on the expected chages in the customer mix in the subsequent
periods, the use of a TDABC system with its time equations will provide managers
with an opportunity to estimate the capacity requirements of different departments.
Thus, the time equations of TDABC will assist the managers in understanding
whether it will be necessary to switch the personnel from one department to the next, in
order to balance capacities among departments. Obviously, with a TDABC approach,
the managers of the hotel will be better equipped to understand whether capacity is
enough to face forthcoming demands. This will allow better manpower planning,
which will in turn foster effective utilization of human resources. With better
manpower planning, the managers will be in a better position to recruit the right type
of employees who can be a good match with the needs of the hotel, as well as they will
be able to estimate training needs of the personnel more effectively. This will in turn
enable appropriate training programs to be implemented accordingly. Arranging
appropriate training programs will assure that the training budget is used efficiently.
At the same time, better manpower planning may also allow the hotel management to
be in a better position to provide long-term contracts to the employees, hence reduce
personnelturnover.This in turn can lead to increasedjob satisfactionand
organizational commitment among employees. Furthermore, the use of time equations
will provide the hotel management with an opportunity to see the time demands of the
activities. This will aid the managers in identfying which activities consume much
time, taking necessary actions in order to reduce the amount of time required by these
activities, and ultimately reducing the costs of serving customers.
Third, the managers, using customer profitability information gained through
TDABC, will be in a better position to determine which strategy (such as focus,
differentiation, and cost leadership) is useful for maximizing the overall profitability of the
hotel. With the help of the results of this case study analysis, the managers of the hotel can
now better distinguish profitable customers from unprofitable ones. Obviously, this will
Customer
result in better-informed managerial decisions. In that respect, the hotel management
should tailor appropriate programs for managing customer relationships. For instance,
profitability
the managersof the hotel shouldimplementdifferent promotional programs or campaigns
in order to attract more profitable customers during different seasons. The hotelanalysis
can
attract low-profit customer groups during low seasons and may provide services to high
income groups at peak times. Additionally, by using a customer relationship marketing
system, the hotel personnel can keep track of customers’ demands and what action635 has
been taken on these demands by other hotels. The calculations made under the
conventionalABC system revealthat some customer groups(customer groups 3 and 5)are
unprofitable. This is due to the fact that, these customers are burdened with the cost of
unused capacity. In this case, based on the ABC analysis, the managers of the hotel may be
tempted to consider raising pricesor cutting costs bychanging service conceptsin order to
turn unprofitable customers into profitable ones. However, raising prices and changing
service concepts,whichmay inturn resultinchangesinthecustomers’quality perceptions
of the hotel, and possibly lead to a loss of customers to competitors. On the other hand,
contrary to the traditional ABC, the TDABC cost analysis shows that prices set for
these customer groups truly cover the costs of serving them, despite the fact that these
customers are low-profit contributors. Based on this finding, the managers of the hotel
should be alerted to revisit the managerial strategies concerning these customers and
tailor new strategies accordingly. According to TDABC CPA outcomes, customer groups
1, 6, and 7 are high profit contributors for the case hotel. Thus, the hotel management
should develop necessary marketing strategies in order to increase guest loyalty from
these customer groups. This will subsequently enable the hotel to subsidize low profit
contributors (i.e. customer groups 2, 3, and 5) with profits generated from the high-profit
contributors. Additionally, having obtained the results of the TDABC analysis, the hotel
management will better determine the customer mix which will generate the highest
returns in the future.
The findings of this study have been generated from a case study in a single
four-star hotel in Turkey. Although the results of this study cannot be generalized to
the hotel industry as a whole, it may shed light to the insights of cost practices in hotels
from a TDABC model perspective. For further research, this study can be replicated in
other hotels both in Turkey and abroad and also at different star-ratings to see if the
results would be generalizable. It would be very interesting for managers of other
hotels to identify profitable and unprofitable customers and their own idle capacity
using a TDABC approach. Furthermore, the TDABC method should be tested in other
organizations (i.e. restaurants) in the hospitality industry in order to provide a better
understanding of the application of TDABC in the tourism sector.
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Correspondingauthor
Ilhan Dalci can be contacted at: ilhan.dalci@emu.edu.tr