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Costs allocation practices: evidence of hotels in Australia.

1. Introduction

In competitive environments managers require timely and accurate cost accounting (CA) information in order to calculate true costs, so that correct product and service prices can be established (Chen, Wang, & Qiao, 2013; Kocakulah, 2007). The hotel industry is also operating in a competitive environment (Patiar, Davidson, & Wang, 2012; Patiar & Mia, 2008), and its products and services are subject to some unique characteristics (i.e., perishability, intangibility, seasonality and time boundedness) (see, Mia & Patiar, 2001). These features increase the degree of complexity in managerial decision making. However, such complexities can be effectively managed by implementing appropriate strategies which require decision makers (i.e., managers) to obtain customised, detailed and timely cost information (Kostakis, Boskou, & Palisidis, 2011; Raab, Shoemaker, & Mayer, 2007). The outcome of such strategies can help hotels acquire larger market share through penetration into new markets and/or introducing new products and services, and improving profitability (Cooper & Kaplan, 1991; Horngren et al., 2014).

Our literature search reveals that hospitality industry managers, and more specifically mangers in the hotel sector, prefer using traditional CA system when dividing various costs (i.e., direct and indirect costs) (Kostakis et al., 2011; Pellinen, 2003). Several researchers argue that the current CA system used in hotels lacks costing accuracy which can result in mangers making erroneous decisions (Raab & Mayer, 2003, 2007; Rivero & Emblemsvag, 2007). Hence, the relevance of traditional cost accounting practices in current competitive and complex environments is questionable (Cooper & Kaplan, 1991; Maelah & Ibrahim, 2007; Mitchell, 1994).

One specific aspect of CA, namely activity-based costing (ABC) promotes a fairer means of costs allocation, particularly in regard to the indirect costs of products and service (Horngren et al., 2014). In particular, ABC assists in tracing overheads (generally those costs that are indirect and somewhat untraceable) through activity centers and, with the use of cost pool rates, makes the representation of overheards more accurate, and allows equitable allocations to particular products (Kennett, Durler, & Downs, 2007; Kocakulah, 2007). Hence, ABC can ensure the elimination of resource wastage, the promotion of less profitable products and services, and the cross subsidisation of inefficient operating departments.

Following the idea that increasing competition in the market place has exerted pressure on organisations to effectively control costs and continually improve the quality of their products and services, this study aimed to assess the level of market competition perceived by Directors of Finance (DF) and the need for a fairer means of indirect cost allocations for the food and beverage operations in luxury hotels in Queensland, Australia.

2. Theoretical framework

2.1. Rationale for the study

There is a body of ABC literature suggesting that when market competition intensifies, organisations tend to adopt more accurate means of allocating indirect costs to reduce waste and remain competitive (Banker & Johnson, 1993; Cooper & Kaplan, 1991; Maelah & Ibrahim, 2007). There is sufficient evidence of ABC related research in the manufacturing industry, healthcare and financial institutions (Cannavacciuolo, Illario, Ippolito, & Ponsiglione, 2015; Filman, 2000; Innes & Mitchell, 1995; Kennedy & Affleck-Graves, 2001; Kocakulah, 2007; Maiga & Jacobs, 2003), whereas a similar level of evidence in the tourism and hospitality industry is lacking, despite this industry's increasingly competitive market and its growing social and economic importance reported in the literature (Kocakulah, 2007; Maelah & Ibrahim, 2007).

Geller and Schmidgall (1997) argue that there is a need to proportion indirect costs to various products and services using an appropriate and agreed basis. For instance, a case study which implemented a system of indirect costs allocation to a hotel's food and beverage operations provided accurate financial information related to each outlets' performance and prompted management to intervene in order to make improvements (Turkel, 1998). Similarly, there is also evidence of indirect cost allocation in the restaurant sector. Raab and Mayer (2003) found that while several restaurant managers were aware of the importance of allocating indirect costs to dishes to determine accurate prices, one establishment applied ABC to better understand its indirect cost structure. Further, Raab and Mayer (2007) and Raab et al. (2007) applied the ABC technique to a number of small of restaurants where labour costs and other key overheads were allocated to individual dishes, furnishing managers with timely and accurate cost information to determine dish selling prices. Thus, this ABC technique helped reduce wastage and improve profits.

In the context of hotels Pavlatos (2011) reported that a small number of hotels adopted ABC in some form in Greece and highlighted that while its application in the rest of world is lacking, Greece has started to make advances in this area. Moreover, Ebimobowei and Binaebi (2013) found the absence of ABC application in hotels in Nigeria and gauged that senior management commitment and investment in systems and employee training is necessary to bring the acceptance of such an innovative technique.

While ABC related research in the hospitality sector has primarily focused on small case studies and mail surveys, more in-depth studies of major hotel companies have been lacking, despite Kotas (2014) arguing that the CA needs of managers in the hotel industry are quite different to other industries. For instance, the success of luxury hotels is dependent upon the delivery of personalised and customised service, often undertaken by the lowest ranking employees. In addition, hotel product and service orders, production, delivery and consumption involve short lead times with higher task interdependency than in the manufacturing industry. Also, finished goods in the manufacturing industry can usually be stored and sold at a later date so at the very least, a certain portion of the total cost can be recovered. In contrast hotel products and services are highly perishable and demand for them fluctuates. As a result, the need for indirect cost allocation in the hotel sector is considered to be high.

Given that there is limited ABC related research in the hotel industry context and the issues associated with the transferability of results from other industries, it is justifiable to conduct this research in hotels. This line of argument is supported by several researchers (Grover, 1987; McGhan & Porter, 1997; Patiar & Mia, 2008). Hence, by making a contribution to fill the current gap in the ABC related research in the hotel sector.

2.2. Market competition and hotels

Managers feel the effect of market competition when rival businesses begin to offer similar products and services with a view to outperform them in terms of increasing their share of the existing market and sales revenue (Khandwalla, 1972; Kocakulah, 2007; Patiar & Mia, 2008). Furthermore, hotels are affected by changes in the market, such as seasonality (Kriegl, 2000; Mattila, 2000), and increased supply of or decreased demand for hotel rooms, due to social, economical or political interventions (Wearne & Baker, 2002). Under these circumstances, managers need to use detailed and accurate information to allocate resources, in order to determine competitive prices and offer customers value for money (Chen et al., 2013; Chen, 1996; Enz & Potter, 1998; Pavlatos, 2011).

Research shows that intense market competition creates competitive threats and decreases product life cycles, increases the number of competitors in the market place and results in declined revenue and profitability (Kocakulah, 2007). To overcome such threats, managers are compelled to increase their existing product range, arrange new distribution channels which affects the customer supply chain, penetrate into new markets and target products to specific customer segments (Porter, 1980). Furthermore, it is possible to manage a competitive threat by offering keener prices than industry rivals (Chen et al., 2013; Chen, 1996; Enz & Potter, 1998; Pavlatos, 2011).

Researchers have recognised the high levels of competition in the hotel industry (Patiar & Mia, 2008; Patiar et al., 2012) and some argue that even in a relatively stable environment, hotels are affected by seasonality (Kriegl, 2000; Mattila, 2000) and the effects of the Global Financial Crises (Munro, Tippet, & Hyland, 2012). Hence, these external environmental forces can impact on the demand for hotel products and services, since several hotels may be chasing fewer visitors. Consistent with previous literature, we argue that the level of competition in the hotel industry, as suggested in proposition one below, is high. Proposition one formally presents the following argument.

Proposition 1: The intensity of market competition perceived by hotel DFs in Queensland, Australia is high.

2.3. ABC application in hotels

2.3.1. Complexity of managing hotels

Management of luxury hotels is a challenging task, as these hotels operate in a competitive environment (Mia & Patiar, 2001; Patiar & Mia, 2008; Pavlatos, 2011) and are subject to a high degree of complexity due to large capital investment, seasonality, the labour intensive nature of hotel products and services and the short production and consumption cycle. Indeed, the issue of capacity management and profitability adds to the complexity of managing hotels. Under these circumstances, hotel managers' understanding of cost behaviour is vital to accurately determine the feasibility of offering different products and services, concentrating on a certain customer base and developing appropriate strategies to attain desired goals (Horngren et al., 2014; Kocakulah, 2007; Rivero & Emblemsvag, 2007).

2.3.2. Current hotel accounting practices

Despite the need for accurate cost information, the hotel sector largely depends on the Uniform System of Accounts for the Lodgings Industry (USALI). This system recommends organising accounting records by departments and allocating only the direct costs to products and services, with the remaining indirect (overhead) costs (i.e., depreciation, rent, energy, insurance, administration and general and marketing) being apportioned to the hotel's total income (American Hotel and Lodging Education Institute, 2014).

However, a major limitation of USALI is that it fails to assist managers in identifying the exact expense of operating a particular department, determining accurate product and service prices and achieving profitability. These limitations restrict managers in making decisions such as whether to retain or outsource certain products and services, and ways to compete on price. The inadequacy of USALI in determining accurate costs for each department reduces product and services costing to guesswork. Given that market forces set the price of a product or service in a competitive market, accurate cost determination is needed to assess profitability (Enz & Potter, 1998; Mia & Patiar, 2001; Patiar & Mia, 2008). Under USALI, costs may be estimated inaccurately, resulting in inappropriate decisions, such as promotion of cross subsidisation or offering less profitable products or services.

Due to the non-allocation of indirect costs to products, services and or departments, the USALI system may make it difficult for managers to establish a realistic selling price. Setting inaccurate selling prices for products and services has long-term implications, such as loss of opportunities and competitive advantage (see Cooper & Kaplan, 1988). We consider that applications of ABC are one way to overcome the shortcomings of the traditional USALI. It is worthy to note that the latest 11th edition of USALI was revised in 2014 and the recommendations remain based on traditional cost accounting methods.

2.3.3. Call for change in the existing hotel accounting systems

Banker and Johnson (1993) and Horngren et al., (2014) point out that to cope with a highly competitive environment, businesses undertake a careful re-evaluation of their costing systems. However, such a realisation is not currently evident in the hotel industry, even though the industry faces increasing competition and the proportion of indirect costs in hotels has dramatically risen due to technology developments (Enz & Potter, 1998). Furthermore, Banker and Johnson (1993) and Horngren et al., (2014) link rises in indirect costs with an increased range of products and services offered. Of course, offering a wider range of products and services increases operational complexity requiring additional support services. Horngren et al., (2014) add that in today's competitive environment, it is difficult to reduce the range of products and services because firms have to attract different market segments and maximise capacity. Therefore, the survival of hotel businesses in competitive environments requires managers to update their costing systems.

2.3.4. Significance of ABC in hotels

Yennie (1999) suggests that ABC classifies particular activity and production costs; it allows managers to establish the reason for the costs occurring and focuses on significant costs linked to operations. ABC gives managers an opportunity to effectively manage and understand activities and processes rather than simply aiming to reduce costs. Indeed, ABC assists in accurate analysis and allocation of overhead costs for various products and services, and departments, and encourages greater accountability and profitability (Kocakulah, 2007). We argue that ABC should be applied in the hotel industry for following four reasons.

First, hotels operate in a competitive market, and face decreasing product life cycles and increasing market sensitivity (Rolfe, 1992). According to Lynn (1994) product strategies that offer customers a variety of products and services provide better value for money than competitors and are one way to deal with the competitive threat. Nevertheless, the formulation and implementation of effective product strategies requires an accurate approximation and monitoring of product attributed-costs. This can be achieved through a fair allocation of indirect costs.

Second, through facilitation of indirect cost allocations, ABC provides managers with detailed cost information, enabling them to market their products and services competitively. Maelah and Ibrahim (2007) and Pavlatos (2011) argue that cost information is important in strategic decision-making for costing products and monitoring performance over time. Managers can use detailed cost information to position their organisation appropriately within the competitive market, which is crucial to sustain the product and service attributes the hotel offers. Thus, achieving a cost advantage over competitors is a basis for such positioning (Bromwich & Bhimani, 1994).

Third, given that the hotel industry faces intense competition, hotels are forced to provide higher quality products and services at lower costs. Implementing ABC is one way for a business to identify unnecessary costs and eliminate wastage without sacrificing quality (Chen et al. 2013; Innes & Mitchell, 1995; Kocakulah, 2007). ABC facilitates equitable cost allocations to support operating departments, and fosters a profit-making process by planning and managing all costs during the production and delivery of products and services (Cooper & Kaplan, 1988). By focussing on cost behaviour and drivers, ABC highlights changes which could be necessary in regard to expenditure patterns, production processes, and management of activities (Cannavacciuolo et al., 2015; Mitchell, 1994). An organisation's ability to eliminate non-value-adding activities can result in increased efficiency followed by improved profitability. ABC helps efficiency improvements through reduction, elimination and sharing of activities (Turney, 1991).

Fourth, the application of ABC promotes cost monitoring and improves the likelihood of achieving organisational objectives. For instance, application of ABC improves individual managers' awareness of the costs incurred in their departments and increases their responsibility for controlling costs. Accurate cost allocations using ABC also enable managers to carry out 'what if types of analyses (i.e., how different product costs would affect future pricing decisions). Swenson (1995) and Chen et al., (2013) report that the use of ABC in manufacturing industries has led managers to perceive noticeable improvements in strategic and operational decisions, pricing and product design and mix decisions, customer profitability analysis, process improvements and effective performance evaluations (see also, Kocakulah, 2007). With the help of detailed and focused information, managers are able to adapt an alternative strategy and improve financial and market related performances (Kennedy & Affleck-Graves, 2001; Kocakulah, 2007; Maiga & Jacobs, 2003). Following the above discussion, we posit that large hotels are likely to apply ABC.

Proposition 2: A high proportion of large hotels in Queensland Australia apply ABC in allocating indirect costs to various food and beverage outlets within the food and beverage operations.

3. Research methodology

3.1. The sample

Hotels with 150 rooms or more and ranked four and five star were invited to participate in this research, since these hotels were more likely to have the operational complexities which required the implementation of a sophisticated cost allocation system like ABC. The General Managers of 74 such hotels in Queensland, Australia were contacted through a telephone call requesting the participation of their DFs in the study, as DFs have significant knowledge of management and cost accounting techniques. Of the 74 General Managers contacted, 19 agreed to participate in the study, yielding a response rate of 25.7%.

3.2. Data collection procedure

Our study followed the university's research ethics guidelines. The study data were collected in two stages. First, through semi-structured interviews with 19 DFs employed in 19 large four and five star hotels that participated in the study. The interviews lasted between 30 and 45 min using a set of pre-determined questions to assess the DFs perceived intensity of market competition, and applications of ABC in the hotel industry. A pilot study was conducted with three hotel General Managers, three Directors of Finance, and four hospitality academics to refine the interview questions. The pilot study interviews lasted between 20 and 30 min. The DFs who participated in the pilot study were excluded from the final data collection sample.

Second, after a period of twelve months, we approached twelve DFs who had participated in the first stage of the study and they agreed to participate in the follow up in-depth interviews to investigate whether any changes in cost allocation practices had occurred, as well as to seek further clarification on previously discussed aspects of hotel cost allocation practices. These DFs represented major Australian and international hotel brands however, of the twelve hotels approached, only five accepted our invitation to participate in the follow up interviews. Nevertheless, while this represents a small number, it is worth noting that these five hotels represented major hotel chains operating large four and five star hotels within the Australian leisure and business hotel market and the companies reflected a diverse range of countries of origin (i.e., Australia, the USA and Europe). Such a heterogeneous group of hotels are likely to provide valid and reliable evidence.

3.3. Measurement of variables

All the participant DFs responded to the pre-determined questions assessing intensity of market competition on a 5-point Likert scale anchored at both ends, with 1 being very low and 5 being very high. The questions assessing ABC application included both structured questions and open-ended questions. The DFs were also asked questions to assess their understanding of ABC in general terms and its application in their hotels.

3.3.1. Market competition

A set of 5-point Likert scale questions developed by Khandwalla (1972) and later adapted by Patiar and Mia (2008) was used in the current study to assess the intensity of competition in the hotel market. The questions asked the DFs to indicate the intensity of the market competition faced by their hotels, in terms of price, the introduction of new products, promotional activities, the overall competition, and the number of competitors.

3.3.2. Application of ABC

The information about ABC in hotels was gathered through interviews with the participant DFs. The interviews involved two structured questions which aimed to identify the current cost allocation practices in each participant hotel food and beverage department. To assess the current level of ABC applications in the participant hotels, the DFs were first asked if their hotels allocated direct costs to individual food and beverage outlets (see Table 2). If they answered the first question affirmatively, then they were asked about the bases for the costs allocations (i.e. actual cost incurred, revenue generated, the use of meters or on a specific agreed basis), followed by if their hotels allocated indirect costs to individual food and beverage outlets and/or to food and beverage departments as a whole, and what were the bases for the costs allocations used.

An experienced researcher in DFs office space conducted both semi-structured and in-depth interviews in two different points in time. The interviews were digitally recorded and transcribed verbatim. Each interview lasted between 20 and 30 min. Two levels of coding helped conduct analysis of the empirical data. First, a line by line analysis identifying key words usually in a gerund (verb or 'doing' format) followed by a second level of coding, which subsumed the codes into a higher order concept. Quotes from the interviews are provided and distinguished with pseudonyms. A discussion of the two sets of interviews is then outlined.

4. Research findings

4.1. Stage 1 semi-structured interviews

The results indicate that the level of formal education among hotel DFs is relatively high; a large proportion of the DFs had a Bachelors or Masters degree in accounting. Moreover, the DFs professional experience in industries other than the hotel industry was also high. This may indicate that the DFs in hotels have the potential to transfer new ideas and techniques from other industries (e.g. manufacturing and financial institutions) to the hotel industry.

The results regarding the DFs' perceptions of the level of market competition faced by their hotels with respect to price, products and marketing indicated the level of market competition in the hotel industry was high, as the mean scores ranged from 3.32 to 4.00 on the 5-point scale. Specifically, the results revealed that price competition was perceived by the DFs as having the highest impact on market competition (the mean score being 4.00 on the 5--point scale). The average number of competitors perceived by the DF of one particular hotel was 6.05, quite high given that the maximum number of comparable hotels within a three kilometre radius of their hotel was nine. Based on the above results, we consider that the market competition perceived by DF in the hotel industry in Queensland, Australia is high and as such proposition one is supported.

The open-ended questionnaire-based discussions with the DFs revealed that while they were aware of ABC as a technique for indirect cost allocations, they were not applying it. This was followed by the participants considering the possibility of ABC application in their hotels. Just under half, nine DFs expressed a high possibility of future applications of ABC in their hotels and the remaining DFs were not sure of its application, as it did not fit with the corporate office requirements.

The in depth semi-structured interviews with the DFs also included gathering data regarding their views on the benefits of applying ABC. The list of benefits presented in Table 1 (Part A) indicates that the highest number of DFs believe ABC improves accuracy of costing, followed by the benefits of identifying problem areas, facilitating greater accountability and enhancing decision making. Among the difficulties of applying ABC (Table 1, Part B), the highest number of DFs mentioned 'additional stress on financial resources', followed by 'too many small costs involved', 'inability to benchmark', 'time consuming', 'conflict among departments', and 'possibility of losing customer focus'. The DFs appeared to believe that applications of ABC would result in more costs than benefits to their hotels.

To assess the extent of cost allocations in hotels, the DFs were asked if their hotels allocated indirect costs to the food and beverage department or individual outlets (i.e., restaurants, coffee shops, banqueting and in-room dining). While only two DFs indicated that they allocated indirect costs, five of the 19 DFs said their hotels did not even allocate materials and direct labour costs to the individual food and beverage outlets, rather their hotels considered various food and beverage outlets as one department. A further three hotels out of 19 allocated indirect costs when assessing the viability of specific projects, such as commercial laundry facilities, and recreational services for customers. These results indicate that there is very limited application of ABC in the hotel industry.

To further assess the level of ABC application, we asked the DFs three questions. First, the allocation of common food and beverage, and labour costs to the individual food and beverage outlets, like in-room dining, formal restaurant, brasserie, and a bar. Second, we enquired how the allocation of shared operating expenses to various food and beverage outlets was done in their hotels. Third, how does a hotel allocate its indirect costs to the food and beverage department as a whole? Table 2 summarises the results of the cost allocation practices used within the food and beverage departments participating in this study. The finding that five hotels did not even allocate their direct material costs (food and drink ingredients) used in the preparation of menu items in respective food and beverage outlets was rather unexpected. Also, direct and indirect salaries and wage costs involved in the food and beverage outlets in these five hotels were not charged to the respective food and beverage outlets. These hotels added all food and beverage revenue and from that deducted direct materials costs to determine food and beverage gross profit. They then deducted direct and indirect labour and other operating expenses spent by the food and beverage outlets (e.g. china, glassware, silver and linen).

However, the remaining 14 hotels allocated direct material costs to each food and beverage outlet, using such bases as actual costs incurred (ten), revenue generated by the outlets (three) and the number of customers served (one), in determining the gross profit for each food and beverage outlet. Furthermore, the same hotels allocated their direct and indirect labour costs and some direct operating expenses like china, glassware, silver and linen using a variety of allocation methods.

With regard to the indirect costs to the individual food and beverage outlets, when we asked whether the respondent hotels allocated any of the above costs to the individual food and beverage outlets, the response was nil. However, when asked if the respondent hotels allocated any of their hotel's indirect costs to the food and beverage department as a whole, as shown in Table 3, only two hotels allocated a few costs (i.e., administration and general, human resources, marketing and property operations) using revenue generated, agreed basis and number of customers served. Other fixed charges related to information systems, energy, taxes and insurance, interest charges and depreciation, which were charged to the hotel aggregated revenues. Based on the above results, we maintain that even in the highly competitive environment, a high proportion of large hotels in Queensland, Australia, are not applying ABC to allocate indirect costs to their operating departments. So proposition 2 is not supported.

4.2. Stage 2 in-depth interviews

After a period of one year, we revisited a sample of hotels and re-interviewed their DFs to establish if there had been any changes in their cost allocation practices in the respective hotels and to seek further clarifications. In interviews the researcher asked, since one year had past, if there had been any changes in indirect cost allocation practices or the use of ABC in their hotel. As Glyn stated:

"Well it is no point changing the systems for the sake of it. Besides, tracing a large number of shared costs to each department and their products is very time consuming and I feel it is an unnecessary exercise. The accounting system prescribed by our corporate office is working well, as individual managers are meeting their set targets and all in all we have pretty good idea of the major costs involved in the provision of food and beverage in restaurants and guest bedrooms".

As suggested by Glyn, the hotel accounting system prescribed by the corporate office was based on Uniform Systems of Accounts for the Lodgings Industry and designed for external reporting purposes. Hence, the CA information provided by the USALI tends to be aggregated and not suitable for managers to utilise when making future decisions. Therefore, managers need to have better access to cost accounting information, particularly in highly competitive market environments. A lack of accurate cost information can lead to managers using 'what if types of scenarios to forecast and build business models to overcome the uncertainty created by a competitive environment and the unique characteristics of the hotel industry (perishability and short production, delivery and consumption cycles), and result in inaccurate and/or incompetent decisions.

However, another DF in this study, Janice, expressed similar concerns to those stated by Glyn and added that an ABC system is somewhat cumbersome. She reported that her hotel did not allocate every single cost, but when it came to some special projects, then they did take into account most of the direct and indirect costs. Nevertheless,, these measures did not go as far as ABC guidelines. She highlighted:

"Recently my hotel decided to build an in-house laundry facility since we were frequently facing quality related problems. You would appreciate in a five star hotel like ours we just can't afford to let quality suffer. Unfortunately, during slack periods the capacity of our laundry facility was underutilised, so we started to offer laundry services to other hospitality businesses in the neighbourhood. Yes, for this we apportioned direct costs and the key indirect costs to determine a competitive laundry service price".

Yet another DF, Ravi, expressed that while he was very familiar with the ABC system and had successfully implemented it in his past job in the banking industry, he believed that its application in the hotel industry was difficult. He expressed his views very openly and explained:

"I fully understand the concept of ABC, but we rather devote our energy into monitoring our room occupancy and average room rate to maximise our revenue. You see, any unsold room on a particular evening is a lost opportunity towards earnings. As far as we can, if we recover all the variable costs and an additional $75, we are happy to sell that room at heavy discount".

Indeed, this is a short-term solution to maximise room revenue, and perhaps this strategy is unsustainable in the long-term. Therefore, the systematic use of ABC could help hotels determine accurate cost figures, which could assist them in negotiating optimum room rates, as well as allow sufficient time to undertake aggressive and well calculated marketing campaigns. In this way they will have clear idea of the exact costs and have the ability to determine if certain markets or strategies are worth repeating or abandoning all together, rather than leaving anything to mere chance.

5. Discussion

These results are likely to be reflective of the situation in large luxury hotels in Australia and internationally. This is because international hotel management companies (brands) manage hotels in various countries outside of their own and 16 of the 19 hotels in this sample represented international hotel brands, such as Sheraton, Hilton, Conrad, Accor, Marriott, Hyatt and Intercontinental Hotels. Moreover, these international hotel brands tend to follow standardised management practices, irrespective of the location of each hotel. This practice was clearly evident from the discussions with the DFs during our interviews and is also supported by Ebimobowei and Binaebi (2013), Mia and Patiar (2001), Patiar and Mia (2008) and Torres and Adler (2012).

The relevant literature also suggests that the hospitality industry leans towards historical information contained in financial reports for planning and control purposes (Ebimobowei & Binaebi, 2013; Enz & Potter, 1998; Mia & Patiar, 2001; Potter & Schmidgall, 1999). The results from this study are consistent with the literature in that the DFs appeared to be preoccupied with historical data in spite of the rather highly competitive market faced by their hotels.

Although the results indicate that the DFs perceived their market competition as high, the relevant literature has suggested that competitive market environments would encourage organisations to cautiously control costs, and therefore adopt modern cost control mechanisms like ABC. However, the findings from this study do not support the literature. It was found that most of the hotels in the study did not apply ABC to allocate indirect costs to supporting, and operating departments. The results revealed that instead, indirect costs (e.g. administration and general, human resources, marketing, and depreciation etc.) formed a large proportion of the total costs of running a hotel. Those costs were then deducted from the hotel's aggregated revenues earned by its different operating departments. In fact, some of the hotels did not even allocate direct material and labour costs to their individual food and beverage outlets (i.e. coffee shop, and speciality restaurant). They combined revenues from various food and beverage outlets, and deducted the direct costs (e.g. cost of food ingredients, beverages and some direct labour) to arrive at the food and beverage department's contributory income. Such an aggregated approach does not reveal the wastage of resources.

When the market is highly competitive, it is important for managers to accurately assess profitability of various food and beverage outlets and operating departments. This is because each food and beverage outlet significantly differs in terms of style of cuisine, menu, atmosphere, level of service and prices charged, volume of sales generated, cost structures and the market mix. Such wide variations between the various food and beverage outlets within one department make it essential to allocate direct as well as indirect costs to each outlet. According to Cannavacciuolo et al. (2015), Chen et al. (2013), Cooper & Kaplan, 1988, Kocakulah (2007) and Maelah and Ibrahim (2007), accurate cost allocations allow effective cost control, since the user departments can be held responsible for the costs they incur and accountability is emphasised, which leads to cost control. Thus, ABC cost allocations enable managers to determine accurate profitabilities for each outlet and to assess and streamline future strategies for poor performing outlets.

Although the DFs in this study felt activity based costing was beneficial for cost control, problem identification and better decision-making, overall there was a low level of activity based costing application in the hotels. This could be due to difficulties perceived by managers in applying the system. Table 2, Part B presents the difficulties highlighted by the managers. Since most of the controllers were qualified accountants, had relevant work experiences in other industries, perceived high market competition and were part of the hotel's executive management team, one would expect them to be in a stronger position to instigate changes to the traditional accounting practices used in the hotel industry.

However, bringing in any kind of organisational change (in terms of new techniques) requires the initiative and full support of the general managers. In the hotel industry, general managers tend to have a traditional outlook in managing the business (Kensbock, Jennings, Bailey, & Patiar, 2013; Maier, 2011; Torres & Adler, 2012). Such a background does not encourage a culture of change and this is perhaps one of the reasons why there has been a lack of support for the DFs to try innovative techniques in the sample hotels. In-depth interviews in stage 2 with a representative sample of five DFs reconfirmed the findings that there had been little or no change in their cost allocation practices in hotels. Instead, they tend to utilise short-term strategies to maximise room sales however, perhaps in the current competitive environment, such strategies will be difficult to maintain in the long-term. These findings are consistent with other hospitality researchers that the use of ABC in hotel and hospitality industry is very low (Ebimobowei & Binaebi, 2013; Kostakis et al., 2011; Pavlatos, 2011; Raab & Mayer, 2007; Raab et al., 2007) despite improvements in the business performance have been reported on the literature (Cannavacciuolo et al., 2015; Chen et al., 2013; Filman, 2000; Innes & Mitchell, 1995; Kocakulah, 2007; Maelah & Ibrahim, 2007).

6. Limitations and future research

This research has three main limitations. First, although the interview responses from the 19 DFs in the first round and the five DFs in the second round provided a fairly consistent view regarding the state of the hotel industry's cost allocation practices in Australia, the sample size was small. Therefore, the results would require caution in generalising to other hotels. Possibly a self-administered survey could be undertaken to reach a larger sample in different parts of Australia and beyond. Second, assessing only the food and beverage department in a hotel is insufficient to evaluate the issues related to hotel cost allocations. Future research should include rooms and other operating departments. Third, the instrument used to measure activity based costing applications was novel. It requires further improvements to provide a more accurate assessment of managers' perceptions of ABC application.

Despite the above limitations, this exploratory research has taken a step forward in assessing senior hotel managers understanding and attitudes towards apportioning various direct and indirect costs to their major departments. This study highlights the lack of appropriate cost allocation systems, resulting in potentially inaccurate product, service, department and section cost information for managers. Therefore, this study has made a significant contribution to the current body of hospitality literature.


Article history:

Received 24 April 2015

Accepted 17 September 2015

Available online 18 November 2015


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Anoop Patiar *

Department of Tourism, Sport and Hotel Management, Glyn Davis Building (N72) 0.31, Nathan campus, Griffith Business School, Griffith University, Brisbane, Australia

* Tel.: +61 7 3735 4104; fax: +61 7 3735 6743.

E-mail address:
Table 1
Directors of Finance perceptions of ABC's advantages and

                                                                 of DF

Advantages of ABC use in hotels
Improve accuracy of cost of products and service                 6
Help to identify where the problem lies                          5
Increase accountability                                          4
Assist in making effective decisions                             4
Ensure effective use of major resource (materials and labour)    3
Help in appraising performance                                   3
Seem like a rigorous management practice                         3

Disadvantages of ABC use in hotels
Place additional strain on financial resources                   9
Involve in far too many small costs                              8
Restrict benchmarking with competitors                           7
Entail significant amount of time                                6
Create conflict with principles of responsibility accounting     6
Compel to loose its customer focus                               6
Result in probable conflict among managers and departments       5
Produce possible operational disharmony                          4

Note: These numbers add up to more than 19, since the DFs were asked
to provide more than one reason for advantages and disadvantages.

Table 2
F&B departments cost allocation to different outlets.

                                           Yes   No   AC   RG   AO

F&B Operations cost items
Materials (items of F&B)                   14    5    10   3    --
Direct F&B labour (salaries and wages)     14    5    14   --   --
Indirect F&B labour (salaries and wages)   14    5    --   3    --
F&B Operations operating cost items
China, glassware, silver & linen           14    5    --   10   --
Licenses                                   --    19   --   --   --
Music & entertainment                      14    5    14   --   --
Uniforms & laundry                         14    5    14   --   --
Training                                   --    19   --   --   --
Operating supplies                         14    5    14   --   --

                                           NE   AB   NC   OM

F&B Operations cost items
Materials (items of F&B)                   --   --   1    --
Direct F&B labour (salaries and wages)     --   --   --   --
Indirect F&B labour (salaries and wages)   6    4    1    --
F&B Operations operating cost items
China, glassware, silver & linen           --   --   4    --
Licenses                                   --   --   --   --
Music & entertainment                      --   --   --   --
Uniforms & laundry                         --   --   --   --
Training                                   --   --   --   --
Operating supplies                         --   --   --   --

Note: Bases of cost allocation; AC = Actual cost; RG = Revenue
generated; AO = Area occupied; NE = Number of employees; AB = Agreed
basis; NC = Number of customers; and OM = Other methods.

Table 3
Hotels' indirect cost allocations to the F&B department.

Cost items                         Yes     No     AC     RG     AO

Administration & general expense    2      17     --     2      --
Human resources                     2      17     --     --     --
Marketing                           1      18     --     --     --
Information systems                 --     --     --     --     --
Property ops. & maintenance         1      18     --     --     --
Energy                              --     --     --     --     --
Taxes & insurance                   --     --     --     --     --
Interest charges                    --     --     --     --     --
Depreciation                        --     --     --     --     --

Cost items                          NE     AB     NC     OM

Administration & general expense    --     --     --     --
Human resources                     --     1      1      --
Marketing                           --     1      --     --
Information systems                 --     --     --
Property ops. & maintenance         --     1      1      --
Energy                              --     --     --     --
Taxes & insurance                   --     --     --     --
Interest charges                    --     --     --     --
Depreciation                        --     --     --     --

Note: Bases of cost allocation; AC = Actual cost; RG = Revenue
generated; AO = Area occupied; NE = Number of employees; AB = Agreed
basis; NC = Number of customers; and OM = Other methods.
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Author:Patiar, Anoop
Publication:Journal of Hospitality and Tourism Management
Geographic Code:8AUST
Date:Mar 1, 2016
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