Example Of Activity-Based Costings Term Paper
Accurate cost estimation has a positive impact in a business. A manager or decision maker can a have a basis on whether he will pursue a certain product or services given the potential profit the business can gain from specific product and services categories. One can also arrive to a correct pricing which is also a component in a successful marketing. This paper will analyze the Activity-Based Costing of a company in a hospitality sector, one of the categories in the services industry.
Suzanne Byrne, Erle Stower, and Paula Torry of the University of Southern Queensland, School of Accounting, Economics and Finance defined Activity-Based Costing as a process that enhances the costing accuracy of a product and service. It also helps the manager determine and assess how the resources were allocated and consumed across the company’s value chain in relation to the results of the strategic operation (Byrne, et.al. 2015).
A study from the State University of New York School of Business revealed that Activity- Based Costing is increasingly used in the services sector nowadays. Traditionally, the said costing method is only rampantly used in the manufacturing sector (Roztocki, et.al. 2015).
Le Pavillion Hotel, a leading hospitality company in the United States, has been operating for a century now. Its architecture is French inspired as it matches the historic French Quarter in the Bourbon Street in the New Orleans. Basically, the hotel was built with a French influence. Le Pevillion Hotel’s website stated that the company was a member Historic Hotels of America and a recipient of AAA Diamond Hotel since 1996 and Gold’s List award in 2005 (Le Pavillion Hotel, 2015).
The said hotel’s services include accommodation, valet parking, concierge, dining, catering and meetings, and celebrations hosting. It was established in 1907 and is headquartered in New Orleans, United States. It currently has e-commerce capabilities through its website, www.lepavillion.com in which clients book for reservations and pay online (Le Pavillion Hotel, 2015).
As a requirement for this assignment, we will analyze the application and benefits of Activity-Based Accounting to Le Pavillion Hotel. Byrne and fellow researches stated that the cost system in question can be applied in six stages namely: initiation, adoption, adaptation, acceptance, routinization, and infusion/integration. Initiation is the feasibility study of the resource allocation, while adoption is the investment decision in terms of amount and budgeting. Adaptation stage is the analysis of the activities and the cost-drivers while acceptance is the stage when investment decision and costing analysis reached the upper management but still considers such plan as a model or a project. Routinization is the stage when the upper management already used the project/model while the infusion/integration is the stage when the Activity-Based Accounting model is already used and a part of the financial system (Byrne, et.al. 2015).
Since the hotel industry is a service sector, firms invest heavily on employees and staff to provide quality services. According to Dobbelstein Thomas and Brehm Carsten of the Baden-Württemberg State University of Cooperative Education, hotel staffs are the main cost of the hotel companies and the costs drivers associated to it are staff recruitment, staff planning, personal development and training, personnel allocation and layout, and personnel activity/efficiency (Thomas et.al. 2015). Having in mind the service of the hotel, we can conclude that Le Pavillion Hotel needs quality employees to implement world class services in the areas of accommodation, valet parking, concierge, dining, catering and meetings, and celebrations hosting.
In the cost analysis of Le Pavillion Hotel, the firm should assess each staff’s performance vis a vis the investment made to them. The assessment can include the average number of clients served and the satisfaction rate. The staff evaluation can be done per service department so as to eliminate or reinvest in the weak staffs while further empowering the profitable staffs. Such can provide an analysis or higher profits while reducing risks or potential losses that can be incurred in the provision of hospitality services. Some reinvestments which are non-staff related such as renovations, furniture acquisition, and the likes should also be considered and accounted per service department add to have a more accurate computation of the Activity-Based Costing.
Narcyz Roztocki and Sally M. Schultz in their study entitled Adoption and Implementation of Activity-Based Costing: A Web-Based Survey said that managers who use Activity Based Costing system enjoy the benefits of cost reduction, identification of areas of improvement, opportunities, profitable, and non-profitable product mix and services (Roztocki, et.al. 2015). Such holds true to any of the hotel firms such as Le Pavillon Hotel. As discussed above on how Activity-Based Costing can be applied to the said hotel, it is clear that the firm will be able to eliminate unnecessary cost while maximize the potential profits through more investments and further enhancement on profitable hotel service sectors and staffs. Such can improve sales and market share as the management will be able to implement more high quality and satisfactory services.
The use of technology in the hotel industry to secure client reservations improves cost efficiency for the company. However, in today’s time, most of the large hotel services providers already use electronic commerce to increase market based and cost efficiency. As a result, the impact of the e-commerce in the firms Activity-Based Cost may be the same to all hotel firms, competition wise. Hence, it does not provide much difference or competitive edge to another key player. This is due to the relatively similar costs of domains and the employees behind the hotel’s e-commerce.
Nevertheless, an e-commerce website helps to retain a firm’s competitive level. On micromanagement perspective, the use of the e-commerce reduces the number of staffs needed in the operation and hence reduces the Activity-Based Cost of a specific department. On the other hand, e-commerce website of hotels may not reduce the number of staffs needed by the hotel as it may also highly increase the volume of transactions. In that case, the hotel may not need to add additional staff and spend for other cost drivers associated with it. Either way e-commerce or online transaction is an important strategy to maximize revenue and profits and to minimize average activity-based cost.
The goal of any enterprise is to maximize profit. Such can be achieved through higher sales and lower operational costs. Applying Activity-Based Cost system in the physical and virtual hotel business management can help achieve higher profit due the more accurate accounting system that can determine firms’ areas of strengths and weaknesses. It is a beneficial accounting method that proved to improve the financial performance of the firms and decision making process of managers, directors, and executives particularly in the large organizations with diverse products and services and wider geographic coverage (Roztocki, et.al. 2015).
Byrne, Suzanne et.al. 2015 (Site accessed). Activity Based Costing Implementation Success in Australia. School of Accounting, Economics and Finance, University of Southern Queensland. Retrieved from https://eprints.usq.edu.au/3719/1/Byrne_Stower_Torry.pdf
Rostocki, Narcyz et.al. 2015 (Site accessed). Adoption and Implementation of Activity-Based Costing: A Web-Based Survey. State University of New York. Retrieved from http://www2.newpaltz.edu/~roztockn/portland03.pdf
2015. Le Pavillion Hotel, New Orleans. Le Pavillion Hotel. Retrieved from http://www.lepavillon.com/
Thomas, Dobbelstein et.al. September 28, 2012. Perception of cost, cost drivers, human resource management, long and short term critical success factors in the hotel industry: Recommendations for hotel management. Baden-Württemberg State University of Cooperative Education. Retrieved from http://www.academicjournals.org/article/article1380379703_Thomas%20and%20Carsten.pdf
Please remember that this paper is open-access and other students can use it too.
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