Preliminary Period Lectures: AB650 – Airline Cost Accounting

Week 1: August 23-24, 2023 – Covers Lecture 1 and Lecture 2

Lecture 1: Course Syllabus & Schedule
Course Unit Number : Aviation Business 650 (Semester 1, AY2023-2024)
Course Unit Credit : 3 units
Course Unit Title : Airline Cost Accounting
Course Unit Description : The course unit delves on how the system of cost
accounting in the airline operation broken down based
on the different functional units of the four major
functions of business e.g. administration, commercial,
financial and line services (production in
manufacturing). The cost accounting of each functional
unit is further broken down into the major operating
expense accounts e.g. labor, energy, water, rentals,
leases, services purchased outside among all other
expense accounts.
Course Unit Objectives:
1. To provide the students a comprehensive body of knowledge on the cost accounting
of the airline business based on its operating expenses and capital expenditures;
2. To provide the students a comprehensive body of knowledge on the cost accounting
of each operating units of the airline organization categorized based on the major
business functions i.e., administration, commercial, financial and line services for
service industries (i.e., production as in the manufacturing industry);
Course Unit Outcomes:
At the end of the course unit the students are expected to:
1. To know how the cost accounting of the airline business is done based on its
operating expenses and capital expenditures;
2. To know how the cost accounting of each functional unit of the airline organization
is done categorized into the four major business functions i.e., administration,
commercial financial and line services for service industries (i.e., production as in
the manufacturing industry);
Readings/References:
 100 Years of Philippine Aviation, 1909-2009: A Focus on Airline Management by
Avelino DL. Zapanta, available at WCC, UP AIT and National Library
 History of Philippine Aviation, 1909-2012; Avelino DL. Zapanta, available at WCC,
UP AIT and National Library
 Lecture Notes including Syllabus in transmitted digitally to students to enable
progressive learning and review of the course online via LMS, ClassIn, and Email;
 Trade magazines e.g., Air Transport World, Airline Business, Aircraft Commerce,
Aviation & Airline Magazine, Flight Magazine, Aviation Weekly & Space

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 Preliminary Period Lectures: AB650 – Airline Cost Accounting

Technology, Airport World, ICAO Journal, Business & Commercial Aviation,

Airport Technology International accessible through their respective websites
 Other aviation references include: Simpli-Flying of Nawal K. Taneja; Strategic
Airline Management of Louis Gialloreto; Making of Airlines of Avelino Zapanta
(Ateneo Library, Thesis); Flying Off Course: The Economics of International
Airlines of Rigas Doganis; Flying, Airports, Turbulence of Serge Barrey and Thiery
Lamiraud; Compendium of International Civil Aviation of Adrianus Groenegewe;
From Worst to First of Gordon Bethune; Air Transportation: A Management
Perspective of J. Wensveen; Winning of Jack Welch; Globalization and Strategic
Alliances of Tae Hoon Oum, Jong Hom Park and Anming Zhang; Stormy Skies:
Airlines in Crisis of Paul Clark; Airline Marketing & Management of Stephen
Shaw; Looking Beyond the Runway of Nawal K. Taneja; Flying Off Course of Rigas
Doganis; Flight of the Creative Class of Richard Florida; Hard Landing: Airline
Competition to Chaos of Thomas Petzinger, Jr.
 Additional reference books: Winning Thoroughbred Strategies of Dick Mitchell;
Grow Your Own Leaders of William Byham, Audrey Smith and Matthew Paese;
Good to Great of Jim Collins; Seeing What’s Next of Scott Anthony and Erik Roth;
Value Code of Richard Boulton, Barry Libert and Steve Samek; Fortune Favors the
Bold of Lester Thurow; Production Management of Franklin Moore; Extraordinary
Leaders of Victor Madarang and Nikki Katherine Dy-Liaco; Leaders: The
Strategies for Taking Charge of Warren Bennis and Burt Nanus; Open Innovation
of Henry Chesbrough; Innovation and Entrepreneurship of Peter Drucker; Top
Management Strategy of Benjamin Tregoe and John Zimmerman; The Purpose
Driven Life of Rick Warren; Marketing Warfare of Al Ries and Jack Trout; A
Passion for Excellence of Tom Peters and Nancy Austin; In Search of Excellence of
Thomas Peters and Robert Waterman, Jr.; On Strategy of Harry Summers, Jr.
Instructor : Dr. Avelino DL. Zapanta
Consultation Hours : Anytime online within office hours (0800H-1700H)
: weekdays (Monday to Friday)
Guidelines:
1. Lectures shall be done 1.5 hours every Wednesday and Thursday at 8:30-10:00 AM
for Section 3A and 10:00-11:30 AM for Section 3B as per the succeeding class/lecture
schedule.
2. Weekly lecture notes will be transmitted to students by LMS every Monday.
3. The weekly lecture will carry additional reading materials. It is imperative to read
these materials. Questions in the quizzes and exams will be sourced from these.
4. There will be a Google Form quiz after the Thursday lecture. The quiz will be
transmitted by LMS after the Thursday lecture.
5. Email shall be the alternative mode of communication: alzapanta@yahoo.com with
copy to Roel Jacob Manzano at jacobroel469@gmail.com.
6. On the day of lecture it is assumed the students have read the lecture for the day
and the additional reading materials.

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7. Nevertheless, the first 20 minutes of lecture shall used not only to wait for late
students. Within the same time, the students are to read/review the lecture and the
additional reading materials, particularly for those who have not read them.
8. Each student is required to write down a question on any item in the lecture or the
additional materials that is not clear to him/her. The students shall be called to ask
their questions 15-20 minutes before the end of the lecture.
9. Alternatively, a student may choose to make a one-minute commentary on any item
in the lecture or the additional materials for which he believes he has lesson and/or
information to share with the class.
10. Questions must be asked in interrogative sentence format e.g., starting with what,
where, when, who, why how. Commentary must be recited in declarative sentence
format.
11. Each question asked will be given a grade of 80 points while each commentary will
be given a grade of 90 to 100 points. These are aimed at improving the grade so far
garnered by the students from the quizzes and the exams. Grades that would
decrease the already garnered grade shall be disregarded. Only those grades that
will help improve will be counted.
12. Recitation sequence/priority shall be established by Roel Manzano based on raised
hands in the student roster. First noted raised hands shall get the priority followed
by the others sequentially.
Weekly Schedule of Lectures
Preliminary Period
Week 1: August 23-24, 2023
1. Course Guide
2. Understanding Airline Cost Accounting
Week 2: August 30-31, 2023
3. Airline Operating Data
4. Cost Parameter
Week 3: September 6-7, 2023
5. Board of Directors
6. President &CEO
Week 4: September 13-14, 2023
7. Administration Group
8. Corporate Communications
Week 5: September 20-21, 2023
9. Human Resources
10. Internal Audit & Control
Week 6: September 27-28, 2023
Preliminary Examination (September 27, 2023)
Midterm Period
11. Legal & Counsel Services (September 28, 2023)
12. Safety & Environment (September 28, 2023)
Week 7: October 4-5, 2023
13. Security & Fraud Prevention (October 4, 2023)
14. Information Systems (October 4, 2023)

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 Preliminary Period Lectures: AB650 – Airline Cost Accounting

15. Commercial Group (October 5, 2023)

16. Product & Market Planning (October 5, 2023)
Week 8: October 11-12, 2023
17. Revenue Management System (October 11, 2023)
18. Sales & Services (October 11, 2023)
19. Reservations Control Center
Week 9: October 18-19, 2023
20. Marketing Support
Midterm Examination (October 19, 2023)
Pre-Final Period
Week 10: October 25-26, 2023
Aerolympics
Aerolympics
Week 11: November 1-2, 2023
All Saints Day (November 1, 2023)
21. External Affairs (November 2, 2023)
22. Financial Group (November 2, 2023)
Week 12: November 8-9, 2023
23. Accounting Services (November 8, 2023)
24. Treasury (November 8, 2023)
25. Purchasing & Logistics (November 9, 2023)
26. Fuel Management (November 9, 2023)
Week 13: November 15-16, 2023
Bloodletting Day for all Students (November 15, 2023)
27. Risk Management (November 16, 2023)
Week 14: November 22-23, 2023
28. Line Service Group
Pre-Final Examination (November 23, 2023)
Final Period
Week 15: November 29-30, 2023
29. Flight Operation (November 29, 2023)
30. Cabin Services (November 29, 2023)
Bonifacio Day (November 30, 2023)
Week 16: December 6-7, 2023
31. Operations Control Center
32. Airport Services
Week 17: December 13-14, 2023
33. MRO
34. Catering
Week 18: December 20-21, 2020
35. Training & Development
Final Examination (December 21, 2023)

Lecture 2: Understanding Airline Cost Accounting

Cost Illusrated:

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 Preliminary Period Lectures: AB650 – Airline Cost Accounting

1. Resources given up in exchange for some goods or services. Resources in the

accounting process are expressed in monetary terms e.g., salaries and wages,
monetary value of machines and materials, cash disbursed one way or the other
and reflected in accounting books as costs and expenses.
2. Resources are Money, Men, Machines, and Materials. Informally termed as the
Four M’s. Formally termed in textbooks as Factors of Production.
3. Goods are concrete products manufactured using any or all of the Four M’s.
Thus, to produce Pineapple Chunks money is expended to buy machines and
tools, and to pay the laborers, and to buy the materials. Men are the managers,
supervisors, and factory workers, among others responsible for the production.
Machines are used to harvest the pineapple, prune them, cut them to pieces, can,
seal, and label and pack them. Materials are the pineapple, the tin cans, paper
labels, the glue, and the carton boxes among many others.
4. Services are intangible products tendered by services companies like the airlines,
the shipping lines, the bus lines, or individuals like players in the performing
arts – actors, singers, event organizers, and travel and tour agents.
5. Expenses are costs incurred to produce a specific product or service. Thus, to
service an airline passenger, expenses are incurred in printing the ticket, in
renting ticket office facilities, in compensating ticket and booking agents, among
many other expenses.
6. Cost is the generic and much broader term many of which are not expressed in
monetary terms such in social conflicts. It costs the lives of soldiers to gain
freedom. It costs a father his life to save his child by donating his kidney. In
monetary terms, it can be said that it costs Lucio Tan a fortune to acquire PAL.
Cost Accounting as a Process:
1. Costs involve the recognizing, reporting, recording, classifying, allocating, and
aggregating of costs. Disbursement of money must be recognized if it is a cost or
otherwise. If it is it must be reported to be recorded in journals and appropriate
ledgers.
2. Reported and recorded costs must be classified as either direct or indirect costs,
fixed or variable costs. It will have to be classified and cost centered. It will
have to be aggregated to arrive at the total cost of a particular activity or
product or service. Costs must be allocated to units that incurred them like
sections, or divisions or departments or groups. It is important in the
assessment of the cost-efficiency of a particular operation. Such assessments
often require benchmarking with the industry or some standard cost
parameters.
3. Cost accounting information is a vital input in the preparation of the business
concern’s financial statements. It is also vital for the use of managers in
determining the cost-efficiency of the performance delivery of their work units.
This may lead to a decision for cost reduction, or cost-cutting, and right-sizing
the amounts of resources thrown into production.
4. In totality cost accounting is part of the most important equation in any business
activity which is:
Revenue - Cost = Profit
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Types of Costs as Correlated with the Airlines’ Cost Accounting

1. Fixed costs are costs that are pegged at the same amount no matter how the level
of flights fluctuate. The rental and leases of hangars, office space, and the
compensations of executives, the depreciation rates of equipment, are not
affected by the increase or decrease of flights, of volume of passengers, baggage,
and cargo.
2. Variable costs are determined by the level of airlines operation. The more
flights, the more passengers and cargo the more the variable costs go up. This
goes for the volume and cost of fuel, the flight time and flight pay of pilots and
cabin attendants, the duty time and salaries and wages of ground personnel
needed for servicing the aircraft and the traffic of passengers, baggage, and
cargo among many other variable costs of the airline.
3. Direct costs of the airlines are those related to the operation of the airline’s own
flights. The costs might be incurred on the ground and in the air during aircraft
operation. The single biggest element of these operating costs would be the fuel
cost.
4. Indirect costs of the airlines are those costs not directly related to the airline’s
own flights, products, and services. These would include costs related to the
airline’s handling of other airlines’ flights in contract for servicing by the airline
service provider.
5. Operating costs are costs related to the operation of the airline both in the air
and on the ground. These include all the costs connected to the operation of the
aircraft, the costs related to the servicing of the airline’s passengers, baggage and
cargo on the ground and on board the aircraft, all compensations of people
directly related to the operation of the airline’s flights and many other costs.
Airline Cost Accounting Concepts
1. Costs usually expressed in terms of money resource are those incurred or
potentially be incurred to realize the profit objective in the airline’s operation of
its flights and other services rendered to customer airlines and other industry
partners.
2. Expenses are costs which are matched against the revenue of a particular
accounting period e.g., fuel cost, crew pay, aircraft and traffic servicing, take-off
and landing charges, salaries, and wages among many others.
3. Cost Center is an alpha and/or numeric code assigned to each operating unit, or
activity, or a person, or capital expenditure item for the purpose of consolidating
all the costs and expenses related to them. For example: A department Sales &
Services might be assigned the Cost Center No. 600. Its sub-departments e.g.,
American Region, European Region, Philippine Region, etc. might be CC 600.1,
600.2, 600.3, respectively. A region might have divisions e.g., Manila Sales Area,
Luzon Sales Area, Visayas Sales Area, Mindanao Sales Area with cost centers
CC 600.3.1, 600.3.2, 600.3.3, 600.3.4, 600.3.4. Disbursement documents e.g., cash
vouchers, would reflect the corresponding cost center allowing the accounting
system to consolidate all expenses related to that particular item. Each aircraft

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type in the fleet would have a cost center to consolidate all expenses related to
say, the B777-200ER fleet, etc.
4. Carrying Costs or holding costs, or money locked up or incurred in maintaining
an inventory of aircraft/ground equipment spare parts, inventory of
obsolete/disposable property items, warehouse space rent, among many other
inventories.
5. NIS or None-in-Stock Cost is incurred when a spare part needed to unground a
grounded aircraft is out-of-stock. The airline loses much in revenue for every
day the aircraft remains grounded.
6. Development Cost is the cost of the process which begins with the decision to
implement a project e.g., a terminal construction, or a new route, or a new
service feature e.g., a frequent flyer program. The cost begins to be incurred
from research and planning to final launch of the project or inaugural of the
flight.
7. Idle Equipment or Facilities Cost is the cost of grounding or mothballing an
aircraft or fleet for obsolescence or reduction of flight operation or leaving a
building structure vacant or unused for one reason or the others.
8. Training Cost is the cost of training pilots, cabin attendants, mechanics, sales
and booking agents, ramp agents, station attendants and all other workers of the
airline. This includes the salaries and wages of the training staff and the cost of
engaging outside services such as inspectors and trainors from the CAAP, the
IATA, and Red Cross for emergency procedures and first aid instruction among
many others.