The Application of Time-Driven Activity-Based Costing in the Hospitality Industry: An Exploratory Case Study

By Basuki, Bas; Riediansyaf, Mertzha Dwiputri | Journal of Applied Management Accounting Research, Winter 2014 | Go to article overview

The Application of Time-Driven Activity-Based Costing in the Hospitality Industry: An Exploratory Case Study


Basuki, Bas, Riediansyaf, Mertzha Dwiputri, Journal of Applied Management Accounting Research


Abstract

In managing a company, the management and the board need accurate information about operational cost structures and profitability in order to help them in the decision making processes. To provide accurate information, a cost calculation system is generally used to show how the company has allocated its resources to supply its products/services.

This paper looks at the application of Time Driven Activity-Based Costing (TDABC) in a service company. The cost object of this research is a Hotel and the Room Division that is the main source of the hotel's revenue. Approximately 80% of the hotel's revenue comes from room rent activity.

Both direct and indirect costs are recalculated using the TDABC method. The results from the TDABC are then compared to the results from the initial cost calculation method used by the company. This research shows that the TDABC method is applicable for Hotel services costing and also that the capacity cost rate can be more accurately and flexibly used in cost compilation.

Keywords

Time Driven ABC (TDABC)

Service Industry Costing

Case Study

Capacity Cost Rate

Cost Driver Rate

Time Equations

(ProQuest: ... denotes formulae omitted.)

Introduction

In recent years, human mobility has increased dramatically, especially those visiting big cities; whether it is for a business trip or just a holiday. This phenomenon has resulted in businessman developing hotels, motels, home stays, etc., to cater for the need for accommodation in those popular cities.

Such hotel developments have had a positive trend year to year especially in Malang, East Java; a popular tourism destination in Indonesia. Due to increasing competition, hotels need to run their operational activities both efficiently and effectively. Therefore, hotels need to consider all of the costs, both direct and indirect cost, and then recoup them via the services provided. Incorrect cost calculations may result in the occurrence of overpricing or underpricing which will later affect the hotel competitiveness and profitability. Nowadays, many hotels are not only offering accommodation services, but also offering restaurants, laundry services, halls or ballroom rentals, etc. This research study chose to concentrate on cost calculations only in a case study hotel's room division. The reason for choosing the room division is based on the fact that the room division provided the dominant portion of revenues in the case study hotel, Hotel Graha Cakra; i.e. almost 80% of the hotel's total revenue of comes from room division revenue.

The current cost calculation method used by the Hotel is a very simple traditional costing method. More modern cost allocation approaches such as, Activity Based Costing (ABC) have been shown to be more effective and accurate than the traditional methods in both manufacturing and service organisations. However, difficulties of implementing ABC systems has resulted in the development of a new approach to ABC by Kaplan and Anderson (2007) called Time-Driven Activity- Based Costing (TDABC).

Theoretical Framework

TDABC was designed to eliminate the problems in ABC systems implementation and operations. As stated by Kaplan and Anderson (2007) this new approach was developed after the following problems with conventional ABC were identified: (1) the interviewing and surveying process was time consuming and costly; (2) the data for the ABC models were subjective and difficult to validate; (3) the data was expensive to store, process and report; (4) most ABC models were local and did not provide an integrated view of enterprise-wide profitability opportunities; (5) the ABC model could not be easily updated to accommodate changing circumstances; and (6) the model was theoretically incorrect when it ignored potential for unused capacity.1

Kaplan and Anderson (2007) stated that "ABC systems were expensive to build, complex to sustain, and difficult to modify" and therefore they made ABC's shortcomings as TDABC's primary strengths. …

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