Customer Profitability Analysis With Time-Driven Activity-Based Costing: A Case Study in A Hotel
Customer Profitability Analysis With Time-Driven Activity-Based Costing: A Case Study in A Hotel
Customer Profitability Analysis With Time-Driven Activity-Based Costing: A Case Study in A Hotel
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(
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)
Table I.
Costs allocated to
customer groups under
traditional ABC
(allocation of costs to
activity-cost pools)
Customer
protability
analysis
615
C
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1
Table I.
IJCHM
22,5
616
A
c
t
i
v
i
t
i
e
s
T
o
t
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l
G
r
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1
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8
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t
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T
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a
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c
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t
(
$
)
1
2
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3
5
,
6
1
9
4
1
,
4
6
8
8
,
7
3
0
2
6
,
1
9
2
1
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9
1
3
2
,
1
8
3
N
o
.
o
f
a
r
r
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v
a
l
s
1
7
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9
9
3
5
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1
2
3
5
,
9
6
4
1
,
2
5
6
3
,
7
6
7
1
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5
7
0
3
1
4
C
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t
d
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r
r
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(
$
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6
.
9
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T
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t
a
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c
o
s
t
(
$
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5
7
9
,
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2
7
8
,
0
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0
8
4
,
9
3
4
9
0
,
4
1
4
4
8
,
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5
8
6
8
,
9
9
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,
7
9
2
N
o
.
o
f
n
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g
h
t
s
3
1
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3
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0
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7
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7
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7
3
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3
9
3
1
4
C
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d
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r
r
a
t
e
(
$
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1
8
.
4
5
2
2
5
M
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e
t
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g
T
o
t
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l
c
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s
t
(
$
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1
2
4
,
4
5
0
9
3
,
8
6
3
5
,
2
1
4
1
5
,
0
4
2
8
0
2
1
,
2
0
3
5
0
1
7
,
8
2
5
N
o
.
o
f
c
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s
t
o
m
e
r
v
i
s
i
t
s
2
,
4
8
2
1
,
8
7
2
1
0
4
3
0
0
1
6
2
4
1
0
1
5
0
C
o
s
t
d
r
i
v
e
r
r
a
t
e
(
$
)
5
0
.
1
4
0
F
o
o
d
p
r
e
p
a
r
a
t
i
o
n
T
o
t
a
l
c
o
s
t
(
$
)
3
8
1
,
3
4
9
1
5
6
,
2
7
8
5
8
,
3
6
4
3
2
,
4
1
2
4
0
,
9
6
9
9
0
,
2
3
6
3
,
0
9
0
N
o
.
o
f
c
o
v
e
r
s
6
7
,
6
5
2
2
7
,
7
2
4
1
0
,
3
5
4
5
,
7
5
0
7
,
2
6
8
1
6
,
0
0
8
5
4
8
C
o
s
t
d
r
i
v
e
r
r
a
t
e
(
$
)
5
.
6
3
6
9
2
B
e
v
e
r
a
g
e
p
r
e
p
a
r
a
t
i
o
n
T
o
t
a
l
c
o
s
t
(
$
)
4
1
3
,
7
8
2
4
1
3
,
7
8
2
B
a
n
q
u
e
t
i
n
g
T
o
t
a
l
c
o
s
t
(
$
)
4
6
8
,
2
4
1
4
6
8
,
2
4
1
T
o
t
a
l
(
$
)
5
6
3
,
7
8
0
1
8
9
,
9
8
0
1
4
9
,
5
6
8
1
1
5
,
2
1
9
1
7
0
,
9
4
1
4
6
9
,
4
4
4
1
1
,
5
6
6
4
2
1
,
6
0
7
Table II.
Costs allocated to
customer groups under
traditional ABC
(allocation of costs of
activity-cost pools to
customer groups)
Customer
protability
analysis
617
.
Group 4. These customers are walk-in customers coming to the hotel without
making reservations. This customer group used accommodation and food and
beverage services and had a 12 percent share in the total sales mix.
.
Group 5. Professional 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.
.
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 7. These 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 identied 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 ofce (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
closing customers accounts), housekeeping (cleaning the rooms, making beds,
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,
carrying out entertainment activities, and cleaning), and banqueting (making
preparations for catering events such as wedding ceremonies, parties, and meetings).
Allocation of costs to the customer groups under traditional ABC
In the case hotel, costs were initially totaled in cost centers along with their dollar value
(Table I). These cost centers were: personnel, stationary, telephone, marketing
(advertising, promotion, billboard, and customer visit costs), accounting and nance,
human resource, administrating, energy (electricity and heating costs), storing (rent,
air conditioning, and insurance costs), cleaning and laundry, purchasing, repair and
maintenance (material and personnel costs), entertainment, food and beverage (cost
of foods and beverage used for restaurant, bar, and catering events), and depreciation.
Then, the costs which were directly associated with particular activities were imputed
to relevant activity-cost pools. The direct costs that the accountants of the hotel
identied were: depreciation costs of equipment, furniture, and xtures that are used in
particular departments, personnel costs, and telephone costs. On the other hand, the
costs not directly related to the activities were allocated to the activity-cost pools by
means of relevant cost drivers. The activity cost-pools were: front ofce, housekeeping,
marketing, food preparation, beverage preparation, and banqueting.
IJCHM
22,5
618
According to traditional ABC literature (Cooper, 1990; Kaplan and Cooper, 1998),
facility-sustaining costs (i.e. accounting, nance, human resource, training, and
administrating costs) should be attributed to the activity centers rather than be traced to
individual customers. Since facility-sustaining costs cannot be determined as specic
costs for particular customers in the case hotel, these costs were rst apportioned to the
activity-cost pools. Then, fromthe activity-cost pools theywere allocatedto the customer
groups. This approach is also consistent with the ABC literature. Since it is difcult
to determine appropriate cost drivers and relevant consumption rates for the costs
of these types, they were apportioned to the activity-cost pools according to some
relevant pattern of usage. For allocating the costs of general support activities such as
administrating, accounting and nance, and human resource, the estimated percentage
of total personnel time spent for different departments was used as an allocation base.
Information about the time that the personnel, who are engaged in the general support
activities, spent for different departments were not documented in the case hotel.
Therefore, allocation of these costs was based on staff estimates of the time they spent on
each department.
For storing the goods, a 120-square meter warehouse was rented next to the hotel
building. The costs (rent, air conditioning, and insurance costs) gathered in the storing
cost center were allocated to the activity-cost pools based on the amount of oor
space occupied in the warehouse, which was measured in terms of square footage.
On the other hand, the costs of the purchasing cost center were allocated using the
number of purchase orders as an allocation base. The costs gathered in the repair
and maintenance cost center were allocated based on the actual maintenance time
spent. Information about the maintenance time was documented by the accounting
department.
The stationery and food and beverage costs were allocated according to actual usage
of stationary materials and food and beverage goods. The actual usage of these
resources was documented and maintained by the accounting department. The laundry
and cleaning costs (i.e. costs of personnel, depreciation cost of laundry machine, and cost
of cleaning materials) were apportioned among activities according to number of
cleaning hours spent. As can be seen in Table I, a major part of the cleaning costs were
allocated to the housekeeping activity because the laundry personnel take the most
time to wash and clean the linens of the rooms.
On the other hand, depreciation and insurance costs relating to the hotel building
were combined with energy costs in the same cost center (because these costs were
allocated using the same cost driver) and they were allocated to the activities based on
the amount of oor space that each department (restaurant, front ofce, banqueting
hall, rooms, bars, and disco) occupies. The entertainment costs were directly imputed to
the beverage preparation activity. Likewise, the costs (advertising, promotion,
personnel, and customer visit costs) which were gathered in the marketing cost center
were directly assigned to the marketing activity (Table I).
In allocating the indirect costs to the activities, cost pool rates were used (some
numbers in Table I were rounded to the nearest dollars therefore the numbers represent
approximate gures). For example, the total amount of purchasing costs was divided
by 662 orders (which is the total number of orders made during the study period) in order
to calculate a cost pool rate of $250 ($165,603/662 orders) per order. Then the rate of $250
was multiplied by the total number of orders made for each activity or department
Customer
protability
analysis
619
in order to allocate the purchasing costs to the activities. For example, the cost pool rate
of $250 was multiplied by 72 (total number of orders made for the purchase of the goods
to be used in the restaurant) in order to compute $18,000 (Table I).
After the costs were allocated to the activity-cost pools, the amounts were summed
up and the total amount of costs for each cost pool was calculated. For example, after
the amounts in the fth column in Table I were summed up, the total amount of costs
for the front ofce cost pool was computed as $125,105. Once the total costs of the
activity-cost pools were computed, the costs of each activity-cost pool were allocated to
the customers via second-stage activity cost drivers which were unique to each
activity-cost pool (Table II). The activity cost drivers used by the accounting personnel
in order to allocate the cost of front ofce, housekeeping, marketing, and food
preparation activity-cost pools were: the number of arrivals, number of nights spent by
customers, number of customer visits, and number of covers, respectively.
The costs allocated to the customer groups were calculated using the activity driver
rates which were computed by dividing the total amount of costs gathered in each
activity-cost pool by the quantity of the relevant activity cost driver. The activity
driver rate computed for each activity-cost pool was multiplied by the quantity of
related activity cost driver that each customer group consumes. For example, the total
cost ($125,105) of the front ofce activity-cost pool was divided by the total number
of arrivals (17,993) in order to calculate the activity driver rate of $6.9529 per arrival.
Then, the rate of $6.9529 was multiplied by the number of arrivals (quantity of cost
driver) related to a particular customer group in order to compute the amount of front
ofce costs that should be assigned to that group. For example, the activity driver rate
of $6.9529 was multiplied by 5,123 (total number of arrivals made by customers
clustered in group 1) in order to compute $35,619, which was the amount allocated to
the customer group 1. The rate per activity driver ($6.9529) was used as a single rate
for the front ofce cost pool because it was assumed that each cost driver activity
(arrival) consumes the same amount of resources. In fact, this approach is consistent
with the traditional ABC literature (Cooper and Kaplan, 1992).
One of the customer groups of the case hotel is the bar customers who come to the
hotel in order to utilize solely the bar services. As a result of the interviews, it was
realized that the bar of the case hotel operates to serve the bar customers rather than
the customers staying in the hotel. It was also realized that customers who stay in the
hotel receive food and beverage services in the restaurant rather than in the bar.
Therefore, the accountants of the hotel assigned the total cost of the beverage
preparation activity-cost pool ($413,782) only to the customer group 8. Likewise,
the total cost of the banqueting activity-cost pool ($468,241) was assigned to the
customer group 6 and customer group 7.
Allocation of costs under TDABC
The calculations made under the conventional ABC system were based on an
assumption that the resources of the hotel were utilized at full capacity. Moreover,
tracing the costs of activities such as food and beverage preparation, making customer
visits, and front ofce may become a challenging task for the hotel management.
This is due to the fact that, the way each customer consumes these activities differs
from one another. For instance, some customers take more of the personnels time to
decide what to eat and drink when they come to the restaurant of the hotel, while some
IJCHM
22,5
620
of them decide quite quickly. Some customers consume all of the available services in
the restaurant, whereas some of them do not. Likewise, some of the customers need
more advice about the services of the hotel at the front ofce, while some of them leave
the front ofce quickly. Moreover, when making visits to particular customers, the
marketing personnel need to travel and stay longer. Furthermore, the marketing staff
members spend more time giving information to some customers before making
customer visits. However, some customers do not consume that much effort and
resources. Thus, diversity in the use of resources by customers is likely to make it
difcult for the hotel management to analyze the costs using a traditional ABC system
because ABC uses single cost driver rate for each activity. This is because, the use of a
single cost driver does not adequately reect resource demands associated with the
activities performed in the hotel. In that respect, the TDABC, with its time equations, is
considered to better reect the resource demands of the activities in the case hotel.
The time unit (in terms of minutes) used for the calculations made under TDABC
were average times. These averages were calculated by taking the average of the times
we obtained through interviews and observations. The staff members in the case hotel
work six days a week and daily working hours vary between seven and 12 hours
depending on the department in which the personnel work. For example, the
receptionists who are employed at front ofce work eight hours and 15 minutes a day,
whereas the administrative personnel such as the accountant and human resource
managers work 12 hours per day. However, the above-mentioned working hours
represent theoretical capacity of the personnel, while we based our TDABC calculations
on the practical capacity.
In implementing the TDABC approach, we did not assign the costs of accounting,
nance, human resource, purchasing and administrating departments directly to the
customer groups because these costs cannot be determined as specic costs for
particular customers in the case hotel. Instead, we considered the ABC cost pools (in
which the costs of support activities were already included) as activity costs for
making calculations under TDABC.
Under the TDABC approach, as it was done under the traditional ABC approach, we
assigned the total cost of the beverage preparation activity-cost pool ($413,782) only
to customer group 8. Likewise, the total cost of the banqueting activity-cost pool is
related solely to customer group 6 and customer group 7. Therefore, we assigned
the cost of the banqueting activity ($468,241) only to customer groups 6 and 7.
Allocation of the costs of front ofce activities under TDABC
The front ofce activity-cost pool consists of direct and indirect costs such as
depreciation, personnel, energy, stationery, telephone, repair and maintenance, and
purchasing. In addition, it includes the costs which are allocated from human resource,
accountingand nance, andadministrating cost centers. The costs gatheredinthe front
ofce cost pool were allocated to the customer segments based on the practical capacity
of the receptionists. This approach is also consistent with the TDABC literature (Kaplan
and Anderson, 2004). Subtasks related to the main front ofce activity are: taking
reservations, giving information to a customer, welcoming the customer, settling the
customer in the room, opening the customers account, monitoring the room in order
to control customers spending, closing the customers account, and accompanying the
customer as he\she leaves the hotel. Indeed, the length of time spent on the front ofce
Customer
protability
analysis
621
activities varies depending on the type of customer coming to the hotel. For instance,
walk-in-customers (group 4) come to the hotel without making reservations, while
customers in group 1, who come to the hotel more frequently than the others, need four
minutes to make a reservation and 2.5 minutes to get information. On the other hand,
it takes totally nine minutes for the personnel to make a reservation (six minutes) and
give information (three minutes) for a customer in group 3. When bar customers
come to the hotel, they only ask where the bar is. Therefore, it takes only 30 seconds for
the personnel to give information to these customers.
The total time needed for the main front ofce activity is obtained by summing up
the times spent on the related subtasks. For example, for a customer clustered in
group 1, the reservation activity starts with taking reservations (four minutes) and
giving necessary information to the customer (2.5 minutes). After the customer arrives
at the hotel, the receptionist welcomes the customer (1.5 minutes), settles the customer
in the room (two minutes), and opens the customers account (1.5 minutes). At the end
of the customers stay, the personnel controls the customers spending and closes
his/her account (four minutes) and accompanies the customer as he/she leaves the hotel
(two minutes). In this case, the total length of time, spent at the front ofce for a
customer in group 1, is 17.5 minutes.
Table III reveals the unit times of consumption of the front ofce activities by
each customer group. For instance, for the customers clustered in group 2, the
receptionists spent 107,352 (5,964 18 minutes) minutes in a year. As Table III shows,
the total time actually needed for performing the front ofce activities during the
study period was 326,600 minutes. Table III also demonstrates the allocation of the
front ofce costs using TDABC.
Through the inclusion of the data presented in Table III (total unit time column of
Table III), we developed the following time equation for estimating the time needed for
performing the front ofce activities:
Total time min for front office activities
17:5
*
#customres
if customer group 1
18
*
#customers
if customer group 2
22
*
#customers
if customer group 3
18
*
#customers
if customer group 4
12
*
#customers
if customer group 5
17
*
#customers
if customer group 6
0:5
*
#customers
if customer group 7
2:5
*
#customers
if customer group 8
The case hotel employs four receptionists to do the front-ofce work and normal
working hours (theoretical capacity) for each person is around eight hours and
15 minutes 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
8:25 hour 60 minutes 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.
IJCHM
22,5
622
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Costs of front ofce
activities allocated under
TDABC
Customer
protability
analysis
623
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
calculated the cost per minute of supplying capacity for the front ofce 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 ofce cost pool to the customer segments.
As revealed by the calculations, around 62 percent [326,600 minutes
(Table III)/524,160 minutes] of the practical capacity of the resources supplied for
the front ofce 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 ofce activities was computed as
$47,155 ($125,105 2 $77,950).
Allocation of the costs of housekeeping activities under TDABC
The housekeeping activity-cost pool includes depreciation, personnel, energy,
cleaning and laundry, repair and maintenance, storing, and purchasing costs. The
housekeeping cost pool also comprises the costs allocated from accounting and
nance, administrating, and human resource cost centers. The total cost of the
housekeeping activity-cost pool was allocated to the customer segments based on the
practical capacity of the housekeepers. The housekeeping activities are classied as
activities that take place before a customer comes to the hotel and activities after
check-out. These activities constitute several subtasks as follows: cleaning and
vacuuming the rooms, making beds, and replenishing linens. The length of time spent
on the housekeeping activities is almost the same for all customer segments except
for the customers clustered in group 5. The customers in group 5 (football players)
come to the hotel after training and football matches and they leave their rooms dirtier
than the other customers. Therefore, it takes more time and effort for the housekeepers
to clean these rooms when compared to the rooms of other customers.
The total time for the main housekeeping activity is sum of the times spent on the
activities performed before check-in and after check-out. For example, before a
customer (group 1) checks in, the housekeeper controls (three minutes), as well as
cleans and vacuums the reserved room (seven minutes). After the customer settles in,
the housekeeper cleans and vacuums the reserved room during customers stay (four
minutes). After the customer leaves the hotel, the housekeeper cleans and vacuums the
room and replenishes the linens (16 minutes). In this case, the total length of time, spent
on the housekeeping activity for a customer in group 1, is 30 minutes. Table IV
portrays the average unit times of consumption of resources of the main
housekeeping activities by each of the customer groups. Table IV also shows the
amount of costs allocated under TDABC. Based on the gures presented in Table IV,
the total time needed for performing the housekeeping activities was calculated as
566,154 minutes.
The case hotel employs seven housekeepers and each housekeeper works 6.5 hours
per day (excluding time for breaks, meetings, arrival and departure, and resting hours).
In this case, each housekeeper supplies about 10,140 minutes per month and 121,680
minutes per year. Thus, the practical capacity of seven housekeepers is 851,760
minutes per year. We combined the unit time gures in Table IV (total unit time
IJCHM
22,5
624
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Table IV.
Costs of housekeeping
activities allocated under
TDABC
Customer
protability
analysis
625
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
customers do not stay overnight in the hotel):
Total time min for housekeeping activities
30
*
#customers
if customer group 1
28
*
#customers
if customer group 2
30
*
#customers
if customer group 3
32
*
#customers
if customer group 4
50
*
#customers
if customer group 5
28
*
#customers
if customer group 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 Table I) 2 $385,015]. 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.
Allocation of the costs of food preparation activities under TDABC
The food preparation activity-cost pool basically consists of depreciation, personnel,
energy, stationery, repair and maintenance, purchasing, storing, and food and
beverage costs. This cost pool also comprises the costs allocated from the human
resource, accounting and nance, and administrating cost centers. We allocated the
total cost of the food preparation activity-cost pool to the customer segments based
on the practical capacity of the personnel working in the restaurant. We identied three
common food preparation activities (preparing and serving breakfast, preparing and
serving lunch, and preparing and serving dinner), with each one comprising several
subtasks. These subtasks are: welcoming customers, taking orders, preparing and
cooking foods, serving the foods, waiting while the customers eat, and after-service
cleaning. In calculating the total time spent on the food preparation activities, the
unit time a customer spends on eating is also taken into account because the personnel
of the restaurant must wait until the customer nishes eating.
The unit and total times spent on the subtasks of the preparing and serving
breakfast activity is presented in Table VI. The total time needed for preparing and
serving breakfast activity is sum of the times spent on the subtasks. For example,
when a customer (group 1) comes to the restaurant, the staff members of the restaurant
welcome the customer and take the order (one minute), prepare and serve the food
(ten minutes), wait until the customer nishes eating (40 minutes), and deal with
after-service cleaning once the customer leaves the restaurant (one minute). In this case,
the total length of time, needed to offer breakfast for a customer in group 1, is
52 minutes (Table VI in order to see the total unit times needed to serve breakfast for
other customer groups).
Based on the data presented in Table VI (total unit time needed for breakfast
column of Table VI), we derived the time equation for breakfast as follows (customer
IJCHM
22,5
626
groups 6 and 8 are not included in the equation because these customers do not have
breakfast in the hotel):
Total time min for breakfast 52
*
#customers
if customer group 1
50
*
#customers
if customer group 2
52
*
#customers
if customer group 3
52
*
#customers
if customer group 4
37
*
#customers
if customer group 5
38
*
#customers
if customer group 7
As can be seen in Table VI, the time spent on performing the food preparation
activities varies for different customers. For instance, since a set menu is offered to the
customers in group 5, it takes up less time for the hotel personnel to perform the
subtasks for these customers when compared to others. Based on the data presented in
Table VI (total unit time needed for lunch column in Table VI), we developed the
following time equation to capture the estimate of the time necessary to implement the
preparing and serving lunch activity (Table VI in order to see the total unit times
needed to serve lunch to all customer groups):
Total time min for lunch 95
*
#customers
if customer group 1
81
*
#customers
if customer group 2
83
*
#customers
if customer group 3
94
*
#customers
if customer group 4
42
*
#customers
if customer group 5
Customer groups 6-8 are not included in the above equation because these customers
do not have lunch in the case hotel. Similar to breakfast and lunch, the estimated time
for the preparing and serving dinner activity can be calculated using the following
time equation that we developed based on the data presented in Tables V and VI. In the
equation, customer groups 6-8 are not included because these customers do not have
dinner in the hotel (total unit time needed for dinner column of Table VI):
Total time min for dinner 145
*
#customers
if customer group 1
106
*
#customers
if customer group 2
108
*
#customers
if customer group 3
129
*
#customers
if customer group 4
57
*
#customers
if customer group 5
Based on the gures presented in Table V, the total time needed for the food
preparation activities was calculated as 3,978,510 minutes. On the other hand, the case
hotel employs 30 employees in the restaurant and each employee works eight hours per
day (excluding meeting and resting hours). In this case, each employee supplies 12,480
minutes per month and 149,760 minutes per year. In that respect, the practical capacity
of 30 employees is about 4,492,800 minutes per year. On the other hand, the total amount
of indirect costs of the food preparation activities amounted to $298,434
[$381,349(Table I) 2 $82,915 (total direct food costs, see Table V)] during the study
period. Dividing this amount by the practical capacity of 4,492,800 minutes per year
produced$0.07 as the cost of one time unit of the food preparation activities. The rate of
Customer
protability
analysis
627
C
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Table V.
Cost of food preparation
activities allocated under
TDABC (allocation of
costs of food preparation
activities under TDABC)
IJCHM
22,5
628
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Cost of food preparation
activities allocated under
TDABC (time spent on
subtasks of the main food
preparation activities)
Customer
protability
analysis
629
$0.07/minute was then multiplied by the total minutes, spent for each customer group, in
order to allocate the costs of the food preparation activities to the customers.
As can be found in Table V, the total amount of the food preparation costs, which
were assigned to all of the customer groups, was $361,408 (including the direct food
costs). This means that, only around 94 percent ($361,408/$381,349) of the total cost of
$381,349 was assigned to the customers using TDABC. In this case, the total cost of
unused resources, supplied for performing the food preparation activities, was
computed as $19,941 ($381,349 2 361,408). This is due to the fact that, only 3,978,510
minutes (Table V) of the practical capacity of 4,492,800 minutes had actually been used
for productive work during the study period.
Allocation of the costs of marketing activities under TDABC
The marketing activity-cost pool consists of depreciation, personnel, repair and
maintenance, advertising, promotion, customer visit, telephone, fax, e-mail, accounting
and nance, human resource, and administrating costs. Advertising costs include costs
of radio and television advertising, as well as the cost of billboards displayed in several
places throughout the city of Mersin. On the other hand, promotion costs include the
cost of gifts (pens, watches, and calendars) presented to the customers. Each gift set
costs around $7.6 per customer. These gifts, however, are not given to all of the
customers staying in the hotel. Since advertising and promotion costs are directly
related to particular customers, we directly assigned these costs to the relevant
customer segments. On the other hand, we allocated indirect marketing costs to the
customer segments based on the practical capacity of the marketing personnel.
The case hotel employs two marketing personnel to make customer visits and related
phone calls. Each person works seven hours per day and six days per week (excluding
meeting, vacation, and resting hours). Thus, each person supplies 10,920 minutes per
month and 131,040 minutes per year. In this case, the practical capacity of two employees
is 262,080 minutes per year. The total cost of customer visits and relevant fax,
telephone, and e-mail costs amounted to $60,112 cost of customer visits $50; 269
cost of fax; telephone; and email$9; 843 during the study period. Dividing this
amount by the practical capacity of 262,080 minutes per year resulted in a cost of
$0.23 per minute as the cost of one time unit. Then, the rate of $0.23/minute was multiplied
by the total minutes, that the marketing personnel spent visiting each customer group, in
order to apportion the costs of the marketing activities to the customer segments.
Table VII demonstrates the allocation of the costs of customer visits under TDABC.
The time spent to make customer visits and perform related subtasks changes
depending on the type of the customer. For example, before making a visit to a customer
in group 1, the marketing staff members phone the customer in order to arrange an
appointment (two minutes). After the appointment is arranged, the staff members give
information about the hotel to the customer via e-mail or fax (two minutes). Then, the
customer is visited (30 minutes). In this case, the total time needed for making a visit to a
customer in group 1 is 34 minutes. On the other hand, it is 52 minutes for a customer in
group 2.
Based on the gures presented in the total unit time column of Table VII,
we derived a time equation to estimate the total time needed for making customer visits
and performing related subtasks (customers in group 4 are not included in the equation
because they are walk-in customers):
IJCHM
22,5
630
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Cost of marketing
activities allocated under
TDABC
Customer
protability
analysis
631
Total time min needed for making customer visits
34
*
#customers
if customer group 1
52
*
#customers
if customer group 2
50
*
#customers
if customer group 3
45
*
#customers
if customer group 5
50
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#customers
if customer groups 6 & 7
25
*
#customers
if customer group 8
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. Interpretation of the results
In this case study, we have developed a TDABC model for the case hotel in order to
implement CPA. Table VIII compares the protability gures computed by means of
the traditional and TDABC systems. The gures in the total cost column in the
traditional ABC section of Table VIII are taken directly from the total column of
Table II. The gures 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 gures in
the total cost columns in Tables III-VII. The total cost gure for customer group 6
and customer group 7 is obtained by adding up the relevant gures 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 gure for customer group 8 is found by adding up
the relevant gures 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 gures 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
Traditional ABC TDABC
Customer
groups Revenue Costs Prot
Relative
protability Costs Prot
Relative
protability
Group 1 948,385 563,780 384,605 0.32 305,007 643,378 0.42
Group 2 216,433 189,980 26,453 0.03 192,274 24,159 0.02
Group 3 146,887 149,598 22,711 20.02 68,729 78,158 0.05
Group 4 315,117 115,219 199,898 0.15 139,057 176,060 0.12
Group 5 160,087 170,941 210,854 20.01 131,688 28,399 0.02
Group 6
and 7 942,892 481,010 461,882 0.40 497,750 445,142 0.29
Group 8 576,000 421,607 154,393 0.13 454,591 121,409 0.07
Total 3,305,801 2,092,135 1,213,666 1.00 1,789,096 1,516,705 1.00
Table VIII.
Comparison of
protability gures
calculated under
traditional and TDABC
IJCHM
22,5
632
and customer group 7, the total amount of the banqueting revenues ($942,892) is related
solely to these customer groups. The amount of the bar revenues generated from
customer group 8, on the other hand, amounts to $576,000.
As Table VIII reveals, customer group 3 and customer group 5 who are
determined unprotable customer segments using a traditional ABC method are found
protable using a TDABC method. For example, the use of a traditional ABC method
demonstrates that customer group 5 (sports clubs) shows $10,854 of loss. On the other
hand, the calculations made with the TDABC method reveal that customer group 5
generates $28,399 of net prot. Moreover, in Table VIII we can observe that, protability
gures computed using a TDABC approach are higher for all the customer groups when
they are compared to the ones calculated using a traditional ABC system.
This case study also highlights the difference between the capacity supplied and the
capacity used in the case hotel. In this case study, we found that $303,039 ($2,092,1352
$1,789,096) cost of unused capacity exists in the case hotel. Of the total dollar amount of
the cost of unused capacity, $41,750 represents the cost of unused resources kept for the
marketing activities. Likewise, the cost of unused resources, which are related to the
activities in the restaurant, is $19,941. On the other hand, $194,193 and $47,155 represent
the costs of unused resources devoted for the housekeeping and front ofce
activities, respectively.
The TDABC analysis in the case hotel reveals that only 66 percent of the resources
supplied for the housekeeping activities (566,198 of 851,760 minutes), 62 percent of the
resources suppliedfor the front ofce activities (326,600 of 524,160 minutes), 89 percent
(3,978,510 of 4,492,800 minutes) of the resources supplied for the food preparation
activities, and 30 percent (79,838 of 262,080 minutes) of the resources supplied for the
marketing activities had been actually utilized during the period of the study.
4. Conclusions and managerial implications
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
ndings 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
protability of the organization. It seems that ABC is a necessary, efcient, but not
sufcient measurement tool for protability 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
Customer
protability
analysis
633
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,
the hotel management will be able to execute CPA 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
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 ofce, 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 protability 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 efciently.
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
personnel turnover. This in turn can lead to increased job satisfaction and
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 protability 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 protabilityof the
hotel. With the help of the results of this case study analysis, the managers of the hotel can
now better distinguish protable customers from unprotable ones. Obviously, this will
IJCHM
22,5
634
result in better-informed managerial decisions. In that respect, the hotel management
should tailor appropriate programs for managing customer relationships. For instance,
the managers of the hotel shouldimplement different promotional programs or campaigns
in order to attract more protable customers during different seasons. The hotel can
attract low-prot 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 action has
been taken on these demands by other hotels. The calculations made under the
conventional ABCsystemreveal that some customer groups (customer groups 3 and5) are
unprotable. This is due to the fact that, these customers are burdened with the cost of
unusedcapacity. Inthis case, based onthe ABCanalysis, the managers of the hotel may be
temptedto consider raisingprices or cuttingcosts bychangingservice concepts inorder to
turn unprotable customers into protable ones. However, raising prices and changing
service concepts, whichmayinturnresult inchanges inthe customers qualityperceptions
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-prot contributors. Based on this nding, the managers of the hotel
should be alerted to revisit the managerial strategies concerning these customers and
tailor newstrategies accordingly. According to TDABC CPAoutcomes, customer groups
1, 6, and 7 are high prot 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 prot
contributors (i.e. customer groups 2, 3, and 5) with prots generated from the high-prot
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 ndings 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 protable and unprotable 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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Corresponding author
Ilhan Dalci can be contacted at: ilhan.dalci@emu.edu.tr
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