Cost accounting for tourism

businesses
Chapter 2. Basic Cost concepts
Cost concept definition
Cost objects
Cost classifications.
Direct and indirect costs.
Different costs for different purposes.
Concept of Cost: What does cost mean?
It has multiple meanings and different types of
costs are used in different situations:
Consumption of resources to get an objective.

• Firstly, we need to know the cost object.

If the users of information want to know the cost
of something, this something is called a cost
object.
• Secondly, the cost of an object may be
analysed in terms of two mesurements:

 A physical quantity measurement

 A price measurement.
Concept of Cost: What does cost mean?
A cost is incurred to generate revenues during
a period.

• For example… A restaurante pays employees

to make and serve food, uses electricity to
operate equipment and light its facilities.
Without incurring in these costs, the
restaurant cannot generate revenues…
• When no revenue nor asset is generated, a
loss is incurred
Concept of Cost: What does cost mean?
A cost is incurred to generate revenues during
a period.

A dissipation
• For example… of assetspays
A restaurante without the
employees
receipt
to make and offood,
serve otheruses
assets either to
electricity
directly
operate equipment andorlight
indirectly
its facilities.
Without incurring in these costs, the
restaurant cannot generate revenues…
• When no revenue nor asset is generated, a
loss is incurred
Cost classifications
• Cost classifications for preparing external
financial statements.
• Cost classifications to describe cost
behaviour
• Cost classifications for assigning costs.
• Cost classificaitons for decision making.
Cost classifications
• Cost classifications for preparing external
financial statements. (Chapter 3)
• Cost classifications to describe cost
behaviour
• Cost classifications for assigning costs.
• Cost classificaitons for decision making.
Cost classifications
• Cost classifications for preparing external
financial statements.
• Cost classifications to describe cost
behaviour
• Cost classifications for assigning costs.
• Cost classifications for decision making.
Cost Classifications for Predicting Cost
Behavior
How a cost will react to
changes in the level of
business activity.
 Total variable costs change
when activity changes.
 Total fixed costs remain
unchanged when activity
changes.

Managers need this information to anticipate changes in costs.

Cost Classifications for Predicting Cost
Behavior
The activity can be expressed in
many ways, such as:

 Units produced
 Units sold
 Miles driven.
 Hours of work…
Cost Classifications for Predicting Cost
Behavior

Total Fixed Cost/activity=Fixed Cost Per Unit

8.000€/1000 meals= 8€ per meal

Total Variable Cost/activity= Variable Cost Per Unit

800€/1000 invoice sheets=0,8-euro cents per invoice sheet
Total Fixed Cost
Your monthly basic telephone bill probably
does not change when you make more
local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

Total Fixed Cost: 50€
Fixed Cost Per Unit
The average cost per local call decreases as
more local calls are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
Fixed Cost Per Unit= 50€/100 local call=0,5 €/per local call
Total Variable Cost

Your total long distance telephone bill is

based on how many minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
Total Variable Cost=0,20€/min x 10 min=2€
=0,20€/min x 12 min=2,40€
Variable Cost Per Unit
The cost per long distance minute talked is
constant. For example, 20 cents per minute.

Telephone Charge
Per Minute

Minutes Talked
Example phone plans
A company is trying to chose among 3 different types of phone plans:
- Rate A: 10 cents per minute of long distance calls
- Rate B: 15 € for up to 240 long distance minutes and 8 cents per
additional minute.
- Rate C: 22 € for up to 510 long distance minutes and 5 cents per
additional minute.

Which plan should they chose if they expect to make 100 minutes,
240' or 510’?

Are they fixed or variable costs? In relation to what?

 Example phone plans

minutes 50 100 150 200 250 300 350 400 450 500 550

Plan A € 5 10 15 20 25 30 35 40 45 50 55

Plan B € 15 15 15 15 15.8 19.8 23.8 27.8 31.8 35.8 39.8

Plan C € 22 22 22 22 22 22 22 22 22 22 24
 Example phone plans
minutes 50 100 150 200 250 300 350 400 450 500 550

Plan A € 5 10 15 20 25 30 35 40 45 50 55

Plan B € 15 15 15 15 15.8 19.8 23.8 27.8 31.8 35.8 39.8

Plan C € 22 22 22 22 22 22 22 22 22 22 24

Plan A: total variable cost with respect to minutes and constant unit cost

Plan B: - total fixed cost with respect 240 minutes and decreasing unit cost
- total semifixed cost with respect 550 minutes and decreasing and constant unit cost

Plan B: - total fixed cost with respect 510 minutes and decreasing unit cost
- total semifixed cost with respect 550 minutes and decreasing and constant unit cost
Example phone plans

Total phone bill

60

50

40

30

20

10

0
0 100 200 300 400 500 600

Plan A Plan B Plan C

Quick Check 
Which of the following costs would be variable
with respect to the number of cones sold at
a Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check 
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check 
Which of the following costs would be variable
with respect to the number of people who
buy a ticket for a show at a movie theater?
(There may be more than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales
C. Wage and salary costs of theater
employees.
D. The utilities cost for the theater.
Quick Check 
Which of the following costs would be variable
with respect to the number of people who buy a
ticket for a show at a movie theater? (There
may be more than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales
C. Wage and salary costs of theater
employees.
D. The utilities cost for the theater.
Cost classifications
It has multiple meanings and different types of
costs are used in different situations.

• Cost classifications for preparing external

financial statements.
• Cost classifications to describe cost
behaviour
• Cost classifications for assigning costs.
• Cost classificaitons for decision making.
Direct Costs and Indirect Costs
A cost object is anything for which cost
data are desired… products,
customers, employees...
Why do mangers assign costs to cost
objects?
 Preparing financial statements, pricing,
profitability studies, control of spending…
Direct Costs and Indirect Costs
Direct costs Indirect costs
 Costs that can be  Costs cannot be easily
easily and conveniently and conveniently traced
traced to a unit of to a unit of product or
product or other cost other cost object.
objective.
 Example: Indirect Costs
 Examples: Direct Costs of of the Room Department:
the Room Department Insurance(1000€),
may include room maintenance
steward's payroll (3000€), costs(3.000€), heating
contract room cleaning
(8.000€), energy
(1.000€), laundry
(4.000€)… costs(6.000€)…
Direct Costs and Indirect Costs
A cost is not direct/indirect by itself, but
depending on the cost object.
 Direct costs can be accurately traced because
they can be physically identified with a particular
object.
 It is possible to measure the amount of
resources consumed.
 However sometimes, costs are treated as indirect costs
because tracing costs to the cost object is not cost-
effective.
Direct Costs and Indirect Costs
A cost is not direct/indirect by itself, but
depending on the cost object.

General’s General’s
Manager Direct Manager
Salary Department

General’s Rooms
Manager Indirect Department
Salary
Direct Costs and Indirect Costs

If we are determined to allocate some indirect costs

into different cost objects…
we will need to find and agree on a criteria to
allocate,
an allocation base
Direct Costs and Indirect Costs

an allocation base

A. Significant determinant of the costs =

Show cause-effect relationship between a change
in the allocation base and a change in the level of
total cost.

B. Easy to apply
 Direct Costs and Indirect Costs
Example: How much do the rooms department cost?
Costs concepts Rooms department

Rooms department employee’s Payrroll (direct)

transport of clients' luggage (Employee payrroll,

trolley to transport suitcases) (direct)
…
(…)

Energy (Indirect)
How to measure energy costs?
How to measure energy consumed by the
rooms department?
Direct Costs and Indirect Costs
Example: How much do the rooms cost?
Costs concepts Rooms

Payrroll (direct) Adopt a system to measure

Xxx the
energy consumed by the rooms
Rooms department employee’s Payrroll
Guest transportation (direct) department.Xxx
Employee payrroll, vehicle costs… Is it techincally feasible?
(…) Is ti economically feasible?

Energy (Indirect)
How to measure energy costs?
How to measure energy consumed by the
rooms department?
Direct Costs and Indirect Costs
Example: How much do the rooms cost?
Costs concepts Rooms

Payrroll (direct) Xxx

Rooms department employee’s Payrroll
Guest transportation (direct) Xxx
Employee payrroll, vehicle costs…
(…)

Energy (Indirect)
Allocation Base
How to measure energy costs?
How to measure energy consumed by the (light spots,
rooms department? sockets..)
Direct Costs and Indirect Costs
Example: How much do the rooms cost?
Costs concepts Rooms

Payrroll (direct) •Significant determinants

Xxx of the
Rooms department employee’s Payrroll costs (representative).
•Show cause-effectXxx
Guest transportation (direct) relationship
Employee payrroll, vehicle costs… •Easy to apply
(…)

Energy (Indirect)
Allocation Base
How to measure energy costs?
How to measure energy consumed by the (floor area,
rooms department? light spots,
sockets..)
Controllable and Non Controllable Costs

Controllable costs: Costs over which a person is able to

exert an influence.
Managers should be held accountable for costs that they can
control.

 Food Department Manager: Food usage, personnel

preparing and serving food, supplies used in food production
and service…
 Is the Food Dept. Manager able to influence the rent paid for
the space the restaurant occupies???
Differential Costs and Revenues
Managers must choose between alternatives.
Each alternative will have its costs and revenues that must be
compared.
Differential costs and revenues: Costs and revenues that
differ among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a neighboring
city that pays 2,000€ per month. The commuting cost
to the city is 300€ per month.

Differential revenue is: Differential cost is:

2,000€ – 1,500€ = 500€ 300€
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the pizza you ate last night relevant
in this decision? In other words, should the cost
of the pizza affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the pizza you ate last night relevant
in this decision? In other words, should the cost
of the pizza affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Relevant Costs

 Relevant costs are those that must be

considered in a decision-making situation. .
 In order for a cost to be relevant bust be
differential, future and quantifiable. All other
costs and benefits can and should be
ignored.
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Sunk Costs or lost cost

Sunk costs cannot be changed by any decision.

They are not differential costs and should be
ignored when making decisions.
A sunk cost is a past cost relating to a past
decision.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
Quick Check 
Suppose that your car could be sold now and
the cost to sell it, including repairs and
licenses, is $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check 
Suppose that your car could be sold now and the
cost to sell it, including repairs and licenses, is
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Opportunity Costs
The potential benefit that is
given up when one
alternative is selected over
another.

Example: If you were

not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
End of Chapter 2